Market opinions from GAM and working with deVere Group
I recently asked GAM, with whom deVere Group has a strong, long-standing alliance, for their analysis of 2014, their forecast and advice for 2015, as well as their views on GAM’s affiliation with deVere Group.
In general terms, how would you review, and put into context, the markets over the last 12 months?
For many investors 2014 appeared relatively calm, as both global equity and bond markets made positive returns over the year. However, most active managers failed to keep up with their broader benchmarks, finding this environment extremely challenging. We witnessed a severe market rotation out of high ROE (growth) stocks into low ROE (value) stocks during parts of the year. The cause of this ‘dash to trash’ was not immediately obvious but the political turmoil in Ukraine, Israel and Iraq (to name a few) led many investors to seek higher yielding stocks irrespective of unsupportive fundamentals. Surprisingly, gilts continued to rise in 2014. We still argue that there is no fundamental reason for this, and given where interest rates are, as well as the likelihood of a rate rise in the near future, the risk of capital loss for anyone holding traditional fixed income should be a very real concern.
Geopolitically, it is clear that 2014 was a difficult year, and we believe that investors should be prepared for another run of potentially choppy markets in 2015. The last 12 months saw:
- A freezing weather snap in the US, dubbed the ‘Polar Vortex’, led to a large drop in US economic output in the first quarter of 2014.
- Concerns over the economic stability of some large emerging market countries, such as Brazil, early in the year.
- A large rotation out of stocks that had performed well during 2013 into perceived ‘safe’ stocks during March and April caught many investors by surprise.
- Russia’s continued intervention in Ukraine, and the rise of a terrorist organisation in the Middle East, led to concerns regarding the wider geopolitical impact.
- Scotland came close to leaving the UK after a 300 year union.
- Democratic protests brought Hong Kong, a major financial centre, to a virtual standstill.
- The Federal Reserve in the US stopped buying bonds, marking an end to one element of their quantitative easing strategy.
- Oil prices sharply declined.
- Concerns over a Greek exit from the Eurozone returned.
We could go on, but the point is clear – 2014 threw a lot at investors and was a difficult year to navigate as a result. However, following the very strong 2013 performance, when the MSCI AC World index returned 21.2% in sterling terms, markets were perhaps due a period of reassessment.
How will what has taken place in 2014 affect what is likely to happen in 2015? What will be the standout differences between this year and next?
The geopolitics of 2014 have undoubtedly weighed heavily on markets, and investors have been disappointed, but it should be remembered that geopolitics tend to be temporary phenomena, often presenting active managers like GAM good opportunities to add to high conviction positions. There seems to be simply too much of a collective vested political interest not to see very sharp declines, after several years of ‘all talk, no action’, the European Central Bank announced a large programme of quantitative easing on 22 January (as did Japan last year). At EUR 1.1 trillion, the figure was more than most forecasters had expected and should provide a key support for European equity markets in the months ahead. Will this monetary policy action save the Eurozone from a Japanese-style multi-year economic slump? That remains to be seen, however, it should give policy makers more time to consider further options on how to turn around the region’s fortunes.
One cause for concern is in the political arena. Following elections in Greece, and those scheduled for May in the UK, there is a strong chance of upheaval among policy makers in the region. After years of depressingly high unemployment figures, staggeringly so among the young, voter discontent could knock early stage recovery plans off-course. With this in mind we have reduced our exposure to the UK. Whilst we believe that the US, as the most dynamic economy in the world, is now entering an exciting phase in its recovery and recent economic data has been encouraging, US stock market gains in 2014 means that the region is not outright cheap. So, identifying stocks that can continue to grow in such an environment is key, we believe that sectors such as ‘New Technology’ exhibit such characteristics.
What would be your overriding cautionary advice or ‘word of warning’ for the year ahead?
‘Risk free assets’… the perception that cash is risk free, in our opinion, is wrong. Whilst it may have extremely low volatility or be very predictable, clients must realise that with interest rates so low, not being invested is exposing their savings to the negative effects of inflation. Our concerns are also mirrored here in the traditional fixed income sector, where in most cases there is very little capital growth upside and little to no income. The worrying thing is that a huge amount of ‘Cautious’ portfolios have the highest weighing to fixed income, which perversely, on a forward looking basis, could be the most risky. As a result, we currently have a zero weighting to traditional fixed income.
In investment terms can you define any potential winners and losers?
Equity markets around the world whilst not outright cheap, particularly in the US and UK, still represent the best opportunity for identifying potential winners. Notably in the regions below…
Europe: While the long-term prospects for Europe remain positive, recent market moves do not reflect the sound fundamentals of many of the underlying index constituents. The region continues to trade at a significant discount to the US market. To date, most of the region’s economic recovery has been centred around structural growth – such as manufacturing in Italy and the rise of both consumer and business spending in Spain – while a ‘second stage’ of cyclical growth is yet to properly initiate. The region produces little oil and is heavily import dependent so the reduction in the oil price will have a big positive impact on terms of trade. With the ECB introducing their own version of Quantitative Easing in 2015, this could provide positive support for European equities.
Japan: It is no exaggeration to say that Japan’s Shinzo Abe is perhaps one of the most visionary leaders in the western world regarding economic policy. His declaration that Japan’s fiscal position cannot be addressed until the economy is on a sustainable growth path – and his calling and winning of an election to make the point – stands in marked contrast to strategies pursued elsewhere. The reform agenda in Japan is the most encouraging aspect of so-called ‘Abenomics’ but it is worth bearing in mind that the focus on QE and a cheap yen is likely to yield diminishing returns in the coming months. Overall though, we are currently witnessing the most concerted effort yet to restore Japan’s economy to its pre-1990 levels of economic health.
Fixed Income: Developed market government bond yields are close to historic lows and this, in our opinion, implies limited upside from this point. It is true that we have said this for a few years now, only to be confounded by yields falling even further, and whilst the asset class made strong ground in 2014, we are not comfortable holding bonds at this stage. To use an analogy…imagine being at a football game and you leave ten minutes early to beat the crowd and miss a few goals, whilst it’s frustrating, you can sit in comfort knowing that you will be at home whilst 80,000 people are desperately trying to leave at the same time. Within the asset class, however, there are investment opportunities that offer both a respectable income and the chance of capital growth. The junior debt of financially safe companies is one such example.
Can you outline why the working relationship with deVere has proven to be mutually beneficial and how it works on a practical, functional level to achieve results? Please give specifics where possible
deVere has allowed GAM to leverage the power of their international network, expanding our reach to regions where we had never previously operated and to clients that we never previously had relationships with. The propensity for deVere advisers to develop their skill set and learn about the GAM proposition has been key to their success. We, in turn, are pleased that we have been able to reward your loyalty and hard work with returns for you and your clients. Since launch, GAM Star Cautious, Balanced and Growth are now at all-time highs, which means we have made positive returns for every single deVere client that has ever invested.
Like deVere, GAM is a global business with offices in London, New York, Tokyo, Dublin, Bermuda, Zurich, Lugano, Hong Kong and Singapore. So support is always on hand regardless of time zone, either directly or via our dedicated deVere support email address. deVere has access to the vast range of materials and research that are produced on a weekly, monthly and quarterly basis. In addition we offer regular access to our research and asset allocation teams.
GAM also travel globally to the deVere offices, giving fund specific presentations and economic updates to ensure that advisers are kept up to date with GAMs latest asset allocation and manager selection views. We also host various client seminars and deVere adviser social events.
Lastly, we have a dedicated GAM/deVere microsite. This provides full fund information; including manager videos, fact sheets, performance, prices and accessing information. GAM also hosts monthly webcasts for all deVere advisers to participate in, ranging from educational pieces on asset allocation; multi asset class investing, managing portfolios to risk, as well as covering performance updates and manager views.
Please can you explain how your product range benefits deVere advisers and, in turn, our clients? New products for release in 2014/2015?
For 30 years GAM has been providing investment services to intermediaries, private clients, institutions and charities. We have a long track record of building close partnerships with professional advisers. We base our success on our commitment to personal service and the virtues of quality, integrity and reliability. Often a name not always recognised by the retail market, referred to as the ‘brand for brands’, GAM runs money for some of the biggest global institutions and pension funds around the world. We are grateful for the opportunity deVere has provided, allowing us to demonstrate our experience of running multi-asset portfolios to a new client base.