Equities are the most attractive asset class for the remainder of 2016 despite current macroeconomic and political headwinds, according to a selection of investment professionals, though many urge investors to remain selective given the strength of the recent rally.
This comes following FE Trustnet’s most recent poll, which found that, out of 1,591 participants, 53 per cent say that equities are their preferred asset class for the second half of 2016.
In contrast, 17 per cent prefer gold, 10 per cent prefer both bonds and cash respectively and 9 per cent would opt for absolute return vehicles.
While this may surprise some investors given the recent shock Brexit result and the subsequent political uncertainty within their home market, the FTSE 100 index (which is used as an indicator for investment sentiment) is actually at its highest peak since the start of the year.
Performance of index in 2016
Source: FE Analytics
Despite this strong performance, not everybody believes that this is a positive sign of things to come. In an article published at the end of last month, ETX Capital’s Joe Rundle said that this is due to the disproportionate number of large international firms in the index.
“There is a key distinction. UK-focused firms are doing much, much worse. EasyJet, Lloyds, Barclays, RBS, Barratt, Taylor Wimpey – they’ve all recorded 20 per cent losses since the Brexit vote,” he said.
As such, does this mean that investors should remain cautious on equities as we head through the year or is this divergence in performance an opportunity to buy into the asset class?
Neil Jones, investment manager at Hargreave Hale, says it is encouraging that a majority of participants are bullish on equities and says that there are indeed plenty of opportunities within the asset class, despite the FTSE 100’s recent strength.
However, he warns that investors need to be selective when it comes to the areas of the market they want to invest in, particularly within the UK market given the divergence in terms of sector and cap-size performance.
Performance of indices over 1yr
Source: FE Analytics
“After such a strong run I am perhaps a little more cautious over the next half of the year and although I always felt there would ultimately be some very good opportunities from a Brexit vote, I did expect greater volatility in near term than we have experienced,” he said.
“I still feel we have trickier times ahead of us, as the EU exit process is still at a very early stage. I can also see a certain amount of investment being held off as a result and the Brexit vote being used as an excuse by some companies to cut dividends and justify some poorer results, so this may knock general sentiment yet.”
Adrian Lowcock, head of investing at AXA Wealth, said that he is unsurprised by the poll results as he believes many investors realise that the referendum won’t change the investment landscape immediately.
He adds that the general response from markets has been overly pessimistic and has therefore driven down the prices of certain assets, which he says has opened up a number of opportunities for equity investors.
“Investors are being pushed into making difficult choices on where to invest but with interest rates heading lower and growth anaemic there are still opportunities to be found which will provide significant returns over the longer term for patient investors,” he explained.
“There are still risks to the global market but the outlook for the US is improving – the employment figures last week gave a boost to this and we expect corporate earnings to improve in the second half of the year.”
“This matters as a growing US will provide support to the global economy. Markets are not cheap though and there are still risks, China has been calm for a while but could still shock investors.”
Generally, Lowcock remains cautious given that global growth has been slowing and that the outlook as we head through the second half of the year is unclear.
Martin Bamford, managing director at Informed Choice, was surprised at the poll results given the fear-mongering headlines used by various media outlets since the Brexit majority vote was announced.
“Investors often feel bullish on equities when markets have performed strongly and valuations start to look expensive. This is a symptom of the investor psychology which can sometimes derail making smart long-term decisions,” he warned.
“It is slightly surprising to hear that investors favour equities in the second half when there has been so much doom and gloom around the economic impact of Brexit and a general slowdown in the global economy. Perhaps investors are more positive about the future than some corners of the media.”
In terms of his personal sentiment, Bamford believes that equities could indeed perform well during the second half of this year and could be bolstered by the continuation of loose monetary policy, such as a pause in interest rate hikes from the Federal Reserve and quantitative easing from the Bank of England.
“We would not recommend increasing tactical allocations to equities to the detriment of other asset classes, but instead suggest investors stick with their long-term strategic investment positions,” he added.
In an upcoming article, FE Trustnet takes a close look at the equity funds the experts are backing for the second half of 2016.
