Posted on: 10 February 2016 by James Humphreys
Just like the stormy weather that has battered parts of the country over the past few days, global markets too have suffered in the first month of 2016 – as the oil price briefly dipped below $30 a barrel, commodities markets bottomed out, China closed its stock markets and billions were wiped off global stock markets.
The press has certainly given the impression that markets are on a one-way trip south. But how bad is it?
The ‘R’ word
Just when you thought we’d finally turned the corner, the term ‘recession’ has crept back into the vocabulary of commentators, particularly in the context of the manufacturing sector.
And it’s true that the longer the manufacturing sector continues to struggle, the more likely it will start to infect other areas of the economy, such as the services sector which still comprises the largest percentage of the US and UK economies. The share prices of banks in particular, have caught a cold due to margin compression and solvency fears.
As the year progresses, we’ll get a better idea of what might happen – if it does pan out to be a short manufacturing recession, then services should be able to weather the storm. But if it’s more protracted, there’s a greater chance that services will be hit - and also investor confidence, resulting in the continued withdrawal of investment. But we haven’t reached this tipping point yet.
Hunting for value in volatile times
The well-documented slowdown in China’s manufacturing sector has meant that the commodity sector and companies associated with it have performed poorly in share price terms. The last six months has seen a slump in the price of aluminium, copper and platinum as demand growth is thwarted by greater supply, and we’ve all seen the fall in the price of petrol at the pumps, hitting oil companies globally.
With volatility in the markets as it is today, you would be forgiven for thinking that it’s all bad news. Well not entirely. Although on a micro level, the number of companies offering growth and ‘out-performance’ are fewer in number than they were 12 months ago, there are still companies that are doing well. In the UK, BT announced good results recently, as well as Google in the US - offering investors and shareholders growth in a low growth environment.
While market indices have declined - which is not helpful if you’ve invested in a fund which passively tracks the index - there is value to be had at an individual stock level. The secret is unearthing those companies that are still managing to grow, directly, or through funds which can actively choose which stocks to be invested in and those to avoid.
Actively adding value
At Duncan Lawrie, we use a blend of both passive and active investment management, and it’s often during times of market volatility that active management or ‘stock picking’ comes into its own in client portfolios.
Where we believe active management is justified, we seek out different styles of actively managed funds to use in our portfolios with the aim of providing our clients with a smoother return.
For example, we don’t want to get all our UK exposure from ‘value managers’ – those seeking stocks that are cheaper than their ‘fair value’ (in expectation of a rise). Although there will be times when that investment style works, we also need fund managers that are seeking growth companies (those companies that are expected to experience high earnings growth), to provide balance.
Investment Management is about creating portfolios that achieve clients’ objectives, within the confines of their individual risk appetites, and at Duncan Lawrie, we believe a blended approach creates portfolios that are more resilient, to withstand the peaks and troughs like those seen at the start of 2016.
All data has been compiled by Duncan Lawrie from sources believed to be reliable. Full details of sources are available on request.
The comments and figures in this document are generally applicable but you should always take specific advice to suit your individual circumstances before taking any action. Errors and omissions excepted.
The value of investments and income generated may fall as well as rise, and investors may not get back the amount invested. Past performance is not a reliable indicator of future results.