The start of 2016 has proved a turbulent time for markets
After closing 2015 at 6,242.30, the New Year saw the FTSE 100 drop 10% to a low of 5,639.90 less than three weeks later. Meanwhile, the oil price dropped below $30.00 this month, whilst the slowdown of the Chinese economy remains very much an issue.
To help investors understand the context of these market conditions, the Association of Investment Companies (AIC) have collated comments from some of the longest serving member investment company managers. They have commented on the current market volatility, and what their experience of similar market conditions has taught them. Please find their comments below.
Mark Barnett, Manager, Edinburgh Investment Trust, Perpetual Income and Growth Investment Trust, Keystone Investment Trust and Invesco Perpetual Select Trust (UK equity share portfolio) said:
"The weakness seen in equity markets since mid-2015 has not been a total surprise as I have felt that in many areas valuations were not cheap enough given the potential risks, namely the lack of earnings growth, the potential monetary tightening in the US, the impact on emerging markets of a stronger dollar and the disruption caused by weak commodity prices, particularly oil.
"I am not a big fan of pure price-taking industries (and do not hold any mining shares in my funds at present) but the current weakness should trigger a big retrenchment in supply, allowing markets to re-balance and prices to recover eventually as higher cost production is eliminated. Oil, being a consumable product, displays relatively robust demand characteristics. The supply increase instigated by Saudi Arabia in 2014 has led to the current price collapse and the industry is now slashing future investment plans. So, once the excess inventories have cleared, we should return to a price regime more in line with the true marginal cost of new supply. We can debate what that is but it is materially above current levels. In addition, the major oil companies can, within reason, adjust their operating and capital costs (much of which is outsourced) to deliver acceptable returns at lower prices and pay dividends. I see BP as the cleanest way to capture such a recovery.
"Outside commodity sectors we have seen weakness in banks. I do not currently hold any mainstream banks in my income funds as I am not convinced that the more bullish assumptions about dividend progression will be met. However, elsewhere in the financial sector I have found plenty of opportunities in areas such as insurance, speciality lending and property.
"At current market levels I am happy to add to most of the holdings in my portfolio as the investment case is built around sustainability and visibility of dividends. Pharmaceuticals, tobacco, support services, telecoms, defence-related companies, various financial services – all these form the backbone of my funds. I do believe that returns in the oil industry will recover but I do not envisage a wholesale reversal of the current disinflationary trends that prevail in the world economy and are making top line growth hard to find in many sectors."
Austin Forey, Manager, JPMorgan Emerging Markets Investment Trust said:
"Volatility is tough but as a long-term investor, our investment strategy does not react to short-term noise. We like to keep things for a long time and focus on buying stocks that will survive, keep growing and maintain their competitive edge. While emerging markets are going through a slow grind, it doesn't feel like a crisis. In spite of the volatility, we're still seeing really strong companies outperforming their competitors at a really good rate. Markets in decline and things getting cheaper often presents a number of interesting buying opportunities."
Peter Spiller, Manager, Capital Gearing Trust plc said:
"One of the indicators we consider when trying to assess investor sentiment is the ratings of investment trusts themselves, specifically their discounts to net asset value. During the depths of bear markets discounts can widen due to forced sellers or simply due to investor capitulation. Today discounts remain as tight as they have ever been, suggesting investors are not scared and are resisting selling. Unless the US goes into a recession it is likely that buyers will re-emerge before long, notwithstanding the fact equities remain materially overvalued."
Angela Lascelles, Manager, Value and Income Trust said:
"Current market conditions, where fear is causing indiscriminate falls in share-prices, provide opportunities to buy high quality companies on attractive valuations. We should remember that the market [FTSE All-Share] is now 10% below its closing level at the end of 2013 and we have had two years of economic growth in the UK, we have a stronger government post-election, and the consumer has more discretionary income than for the last six or more years. Low oil and commodity prices will encourage growth in the developed economies once the turbulence is passed."