Multi-asset

09:00 1 July, 2016

Multi-asset: One week on from the Brexit vote

Given the political shock of the UK’s vote to leave the European Union (EU), market movements since the referendum was have not been as dramatic as one might have expected.

After some significant volatility in the immediate aftermath of the result, announced on 24 June, a sense of calm returned to global markets in the following week – for the time being at least.

As such, the M&G Multi-Asset team has not yet observed market movements significant enough to justify materially adjusting its fund portfolios. The team, however, remains watchful for value opportunities created by contagion of pessimism away from the ‘eye of the storm’. Investing for the long-term where asset prices depart from their fundamental values because of emotion is the essence of the team’s ‘episode’ investment philosophy. 

Since the referendum, the price of mainstream government bonds, like those of the US – traditionally seen as among the lowest-risk investments – has risen, reflecting high levels of risk aversion among investors. Higher prices have pushed the yield on these bonds – annual investment returns as a percentage of the price paid – lower.

With falls in the yields on mainstream bonds, the risk premium – in terms of higher prospective investment returns – on certain emerging market government bonds, such as Mexico for instance, rose sharply, thus enhancing their appeal, in the team’s view.

The value of investments will fluctuate, which will cause fund prices to fall as well as rise and you may not get back the original amount you invested.

The views expressed in this section should not be taken as a recommendation, advice or forecast. We are unable to give financial advice. If you are unsure about the suitability of your investment, speak to your financial adviser.

Please refer to the glossary for an explanation of the investment terms used throughout this section.

 

16:00, 28 June 2016

Multi-asset: keeping perspective after Brexit

Juan Nevado is a fund manager in the M&G Multi-Asset team

The UK’s vote to leave the European Union this June was a shock to global markets, but it is important for long-term investors to keep things in perspective.

Stockmarkets around the world fell sharply after the referendum result, with the MSCI World index – a benchmark measure of share performance from across major markets – down 5.9% on 27 June compared to 23 June, the day of the vote.

In mid-August 2015, however, international stockmarkets fell by 7.2% over two trading days, according to this index. In this sense, the EU referendum result has been a less serious ‘episode’ for global investors.

Possible drag on the UK economy

The UK economy has carried positive momentum over the last couple of years, growing faster than the eurozone, but the effect of the referendum result is widely expected to have a negative effect on economic growth, for the short term at least.

Accurately predicting economic growth is notoriously difficult, but it seems clear to us that business and consumer confidence in the UK will decline amid uncertainty surrounding what the post-Brexit settlement with the EU will look like. Falling demand in the economy would act as a drag on economic growth.

Although the UK’s large current account deficit – the value of imports minus exports – is likely to rise in the short term because the value of the pound has fallen relative to other currencies, this has not detracted from investors’ willingness to buy UK government debt, and therefore the ability of the UK to borrow money.

Government bonds in demand

Following the referendum, the price of mainstream government bonds – traditionally seen as among the lowest-risk investments – has risen, reflecting high levels of risk aversion among investors.

Higher prices push the yield on bonds – annual investment returns as a percentage of the price paid – lower. The yield on benchmark 10-year UK government bonds fell to an all-time low and stood just below 1% at midday on 28 June, despite the UK being stripped of its last remaining ‘AAA’ credit rating since the Brexit vote. Credit ratings reflect the perceived ability of a borrower to repay their debts.

The rally in bond markets has reduced yields, taking many western government bonds into negative territory. When bond yields are negative, buyers are effectively accepting a nominal financial loss if they hold the bonds until they mature – in other words, they will get less than they paid. Once the effect of inflation is taken into account, many more mainstream government bonds currently offer investors negative yields.

Value opportunities

In comparison, we believe that global equities, or listed company shares, currently offer value opportunities for investors, by and large. Certain emerging market government bonds also look attractive in value terms, in our view, as they generally offer much higher yields than those of developed countries.

Many stockmarkets with very limited exposure to the UK or European economies, such as Japan, fell sharply following the UK referendum. Where asset values have been hit as a result of contagion, rather than because their fortunes are likely to be tarnished by slower UK or European economic growth, we believe value opportunities could arise for long-term investors.

The M&G Multi-Asset team is watching global markets closely to act where asset prices have fallen as a result of emotion-led investing, following the Brexit vote, rather than because the fundamental value of an asset has been reduced.

Our focus continues to be on identifying long-term value opportunities.

The value of investments will fluctuate, which will cause fund prices to fall as well as rise and you may not get back the original amount you invested.

The views expressed in this section should not be taken as a recommendation, advice or forecast. We are unable to give financial advice. If you are unsure about the suitability of your investment, speak to your financial adviser.

Please refer to the glossary for an explanation of the investment terms used throughout this section. 

 

12:30PM 24 June 2016

 

12:00PM 24 June 2016

Multi-asset: Views from the fund manager

Steven Andrew is a Fund Manager in the M&G Multi Asset Team

Short-term volatility in financial markets can create opportunities for long-term investors, and the fall-out from the UK’s vote to ‘Leave’ the European Union (EU) is no different.

The referendum should not be understood in isolation, but as part of a global manifestation of public discontent. Political protest will continue to prompt market volatility, but we feel this in itself should be of limited concern to long-term investors.

Volatility is not risk

Indeed, short-term volatility – fluctuations in asset prices – is not equivalent to risk. True risk is the possibility not of temporary paper losses, resulting from day-to-day market volatility, but of protracted or permanent loss of capital when you come to sell assets.

The M&G Multi Asset team has been careful not to join the bandwagon of investors that is treating the referendum result, however politically significant, as a matter of earth-shattering importance for investment markets. Instead, our focus continues to be on identifying long-term value opportunities.

We believe that investors focused on achieving long-term value should aim to buy assets when they judge the market price to be cheap, as they could potentially profit when the assets move back towards their fair value if the short-term factors recede.

Volatility in the immediate aftermath of the UK’s ‘Leave’ vote should throw up opportunities to acquire assets that have been under-priced following knee-jerk market over-reactions to the result.

Please note, the value of investments will fluctuate, which will cause fund prices to fall as well as rise, and you may not get back the original amount you invested.

Ignoring market noise

The UK pound clearly bore the brunt of market turmoil in early trading on the morning of Friday 24 June, once the result became known. Relative to the US dollar, the pound fell 10% overnight, but it is important to bear in mind that it traded at a comparable level early in 2016 when investors became concerned once again on global growth and weakness in the oil price.

Share prices also declined significantly – and predictably – across the UK and European stockmarkets in early trading. The prices of other global assets were also hit, even many that appear to have limited exposure to the economies of the UK, or even Europe. One such example is Japanese banks, whose share prices fell sharply in early trading on Friday.

It is important for investors to take a deep breath and reflect on the fundamental long-term value of assets. The M&G Multi Asset team believes that a widespread aversion to volatility, combined with over-pessimism about future returns on capital, has led to a large imbalance in the relative value of different assets.

While it may be tempting to want to buy assets that are traditionally perceived to be safer in order to avoid volatility, investors could be at greater risk of losing money over the long-term if their real returns on investment, after inflation, are negative.

The value of investments and the income from them will fluctuate. This will cause the fund price to fall as well as rise. There is no guarantee the fund objective will be achieved and you may not get back the original amount you invested.

Please refer to the glossary for an explanation of the investment terms used throughout this section.

The views expressed in this section should not be taken as a recommendation, advice or forecast. We are unable to give financial advice. If you are unsure about the suitability of your investment, speak to your financial adviser.

Past performance is not a guide to future performance.

 

10:00AM 24 June 2016

Multi-asset: focusing on the fundamentals

Financial markets around the world have responded significantly to the UK’s vote to ‘Leave’ the European Union (EU). Some of these market movements may, in time, be seen as an over-reaction.

After months of uncertainty, the referendum result at least adds some clarity for investors, but introduces new uncertainties that will only be resolved in the coming months and years. Political uncertainty is naturally uncomfortable, but global investors must reflect on whether the result accurately represents any fundamental change in the investment environment.

While it could be argued that it justifies the UK pound’s 10% fall in value relative to the US dollar during the night of the referendum result, does it justify a large fall in the value of shares in Japanese banks, for instance? The scale of some market movements around the world following the result could reflect a degree of short-term panic, rather than a measured response.

There has been a predictable flight by investors towards major currencies perceived as ‘safe havens’, including the Japanese yen and the Swiss franc. Declining prices across European stockmarkets on Friday morning were also anticipated.

Market over-reactions present opportunities for long-term investors, however. M&G’s Multi-Asset team will be carefully watching for buying opportunities in areas where we believe assets are being sold off too aggressively as a result of this news event.

While the referendum is of course a significant development, investors should be wary of arriving at simplified conclusions. The UK’s vote does not outstrip the fundamentals of the global economic outlook. What’s more important than where we are at the end of today is where we are in a month or a year’s time.

The views expressed in this section should not be taken as a recommendation, advice or forecast. We are unable to give financial advice. If you are unsure about the suitability of your investment, speak to your financial adviser.

Please refer to the glossary for an explanation of the investment terms used throughout this section.