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Nichie WuLiu Blogs and Reviews

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Have shares risen too far, too fast?

The Haney Group (Sept. 01 2013) - That’s the view of one of the country’s biggest asset managers, AMP Capital, who are reducing equity holdings for the first time since 2011. AMP’s Nader Naeimi, who heads up the analysis of the key economic and market factors that move global markets, says cash is the safest place right now.


But is this the consensus in the investment industry, or the view of a lone ranger?

Of course, cash is the safest place in any market as there is very low risk of losing the investment – the bank has to go really badly bust! However the trouble is that cash also offers one of the lowest returns of any asset, so there’s a good chance your investment is going nearly nowhere.


Looking more broadly at the AMP asset allocation chief’s comments, Naeimi predicts the easing of Federal Reserve stimulus will spark a 10% fall in US stocks by year-end.

Taking a straw poll of some other investment pros, this opinion is certainly not unanimous.

Nathan Bell, Research Director at Intelligent Investor Share Advisor, admits the outcome is not clear cut, but says they’re not waiting for a huge catastrophe in the US.

“There’s no easy answer, but if the economy there can strengthen in the right places and enough blue collar jobs are created, then the economic recovery should ease the sharemarket impact of tapering.”


In fact, Bell is actively pursuing more international diversification at the moment through companies like CSL, ResMed, Computershare and News Corp - outfits that have significant international exposure, particularly to the US.


It’s a view shared by Hamish Douglass, Lead Portfolio Manager at Magellan Global Equities, who says nothing has fundamentally changed in their view on the US economy over the past twelve months.


“There continue to be encouraging signs that the US is undergoing a modest economic recovery,” Douglass says.


And while Magellan believes the major investment risk remains what will happen when the Fed ends its quantitative easing programme, they note that a well-managed exit shouldn’t be a cause for great concern.


In the case of an orderly unwinding of QE, Douglass says “we would expect elevated market volatility and potentially some dramatic repricing of certain asset classes as this unfolds. We view this as the most likely scenario and one that does not overly concern us from an investment perspective.”


Given the Magellan Global Fund currently includes a large US focus, with significant holdings in Microsoft, Google, Yum! Brands, Wells Fargo and American Express, this says a lot about the ability of quality companies in a well-constructed portfolio to ride out any ‘correction’ that might occur.


The challenge, according to Bell, is finding that quality at the right price. And with the Australian market a bit limited in terms of earnings growth in the local economy, this involves looking abroad.


Not just anywhere, mind you, as the rush the buy quality businesses following the GFC and ongoing Euro Zone debt crisis has left a lot of the best businesses looking quite expensive. But far from warning away from US markets, Intelligent Investor are actually getting on board the recovery there.


“Europe is not a big focus for us, for two reasons,” Bell explains. “First of all the valuations for quality European businesses are still sky high, and secondly, US focussed businesses are much better performers at the moment. In the US there are still some good recovery stories at the right price.”


This begs the question then, what is the big risk facing investors as Bell sees it?

“Our concerns are more centred around China and the slowing in emerging markets. With our economy still dependant on mining for 8% of GDP, versus a long term average of 1% to 2%, we’re obviously very highly leveraged to what happens there.”

However, even with these concerns, Intelligent Investor’s model portfolios are still only 11% to 17% in cash, indicating they’re not rushing out of equities just yet.

What does this all mean for you?


If you listen to public investment commentary for market direction, don’t get too caught up on the words of one adviser. Take a wider view, weigh up all the viewpoints and form your own opinion, because, as Bell says, there’s never an easy answer.