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A tale of two halves - alpha vs beta strategies for 2016
THE inauspicious start to the global capital markets this year is nothing out of the ordinary. Arguably, global markets could historically start on either a positive or a negative note; the outcome largely depends on what marginal investors choose to focus on alongside their concomitant expectations - typically characterised by either a bullish or bearish tilt. The year 2016 commenced as market bears wrestled with an upper hand by dwelling on the recessionary impact of falling oil/commodity prices and the slowdown in China on the global economy - two concerns that have been around for the past years.
Do not be mistaken: the starting point does not necessarily set the tone or trend for the year - at the end of the day, fundamentals overrule and determine both the short- and long-term direction of global capital markets. In fact, should you have harkened to the disastrous scenarios the doomsayers and renowned market experts had spun in recent years, you would have clearly missed out on all the action in the past five years; to this end, your returns would have also gone down the tube.
Understandably, doom and gloom sells and it's easy to be subjugated to inaction or fear by the perennial scare stories coming to the fore every now and then; these attention-gripping views include global economic and market crashes, the break-up of the eurozone and the euro, a US$5,000 gold price target and, not least, a hyperinflation in the United States.
The reality is that economic growth and market progression remain the norm, albeit punctuated by slowdown, bear markets and recessions from time to time.
Of note is that the underlying fundamental picture remains more or less unchanged; besides, from our vantage point, we have yet to see any game-changers on the horizon to alter our belief that growth is the norm. It, therefore, follows that the primary trends of global capital markets initiated in the aftermath of the sovereign debt/credit crisis five years ago remain intact. However, for now, a continuation of this upward trend would presumably be an uphill struggle at the late stage of the economic cycle.
This is because geopolitical and growth concerns may still fester for some time to come; so, in the near term, brace up for heightened volatility as investors could continue to indiscriminately sell into further weakness. In fact, this murky outlook can arguably persist as long as valuation for global equities remains still somewhat elevated and oil prices slide in the near term. Tellingly, the tussle between a continuation and reversal of primary trends will be evident in the periodic market volatility.
It's, therefore, important to have an appropriate investment time horizon as time in the market matters; clearly, the odds of registering positive returns increase as the investment holding period lengthens. However, in avoiding being frozen into inaction and becoming a mere market spectator, it's good to assume smaller trading positions from time to time; the rationale is that sentiment-driven markets tend to see asset prices going into extreme price levels - typically seen during a market capitulation stage before markets stage a near-term retracement. Such profitable trades are possible with a strict sell discipline that is backed up by clear price targets.
An effective investment strategy for 2016 needs to incorporate several key considerations: firstly, always anchor your investment views and conviction on a fundamental outlook; secondly, identify and acknowledge the fluctuations of short-term trading momentum; and lastly, remember that the trend is your friend and appropriately capitalise it to your advantage taking into consideration both the shorter- and medium-term investment issues. Thus, we suspect 2016 could evolve into a tale of two halves.
The first half of 2016 could see a continuation of trends that started in the second half of 2015. The outperformers and underperformers of 2015 are likely to persist into the early months of the year which argues for an alpha investment strategy. That means staying invested in Japanese equities, remaining cautious on the energy sector and, lastly, have some gold exposure only as a prudent portfolio overlay in view of still negative long-term gold price trend.
The second half of 2016 could see a reversal of fortunes as the murky global outlook brightens eventually. Already, there are some green shoots of economic improvements in the horizon for both the eurozone and the US. The US consumer can still be relied upon to spend into a more sustainable economic recovery. Thus, the underperformers in H1 2016 would start to see some light at the end of the tunnel: both the European stocks and the US dollar can resume their upward climb and the economic fundamentals of the two largest economies and markets in Asia - namely China and India - would see more sustainable improvements.
As always, when capital markets are nearing or in a capitulation stage, the negative market din and investors' sentiment can be overwhelmingly drowning. As such, even constructive or potentially positive news flow or economic data could fall on deaf ears; and to complicate matters, it's difficult to predict the change in investors' psyche. However, astute investors would always anchor their views on a fundamental bearing, lengthen their investment time horizon and stay composed enough to recognise both the short- and long-term trends to their advantage.
- The writer is chief investment officer, Asia and Middle East, Barclays Wealth and Investment Management