Mark Dampier: Don't listen to stock market doom-mongers - sit back and enjoy the sun
Friday 01 August 2014
It must be summer – the sun's out and the pace of life slows. Yet some of us don't seem able to slow down, and insist on stirring the pot. Headlines remain beset with stories of stock market Armageddon, bond meltdowns, plagues of locusts …
The reality is no one really has any idea what will happen next week, next month, or even next year. Stock markets have climbed a wall of worry from their low point in March 2009. Many forecasters suggested the market could halve again.
At some stage I expect the bears will be proved right – if you cry wolf long enough, it will come and eat you. In my view, rather than constantly churning their portfolios after the release of every new piece of economic data, investors should sit still, stop looking and ensure they have enough cash for their rainy day needs.
According to some commentators, most asset classes are in a bubble – an expression now being used liberally for any asset price that has the temerity to rise (and against what the experts think should happen).
In 2010, and every year since, we have been told there is a bond bubble. Those who paid heed to those warnings would have lost out on great gains. Now, I don't believe there is great value in many bond markets. But it gets you thinking when you realise those bubble warnings first started when gilt yields were at 4.5 per cent, yet gilt yields continued to fall, alongside rising prices.
The new worry is liquidity drying up in the bond markets. The standalone term "liquidity" means little to the majority of people. In this case, should the bond bubble burst and all investors head for the exit at once, a few will get through, but the rest will get piled up by the door. The concern is corporate bond markets are not able to cope with mass selling, but this is true of nearly all financial assets if everyone heads for the exit at the same time.
Commercial property seems to be back in fashion, if you look at recent IMA statistics (highlighting significant inflows into property funds). To me, this market is genuinely illiquid. Similar to residential property, commercial property can take months to buy and sell.
Open-ended funds are not the best-placed investment vehicle to manage commercial property; as there are a variable number of units in circulation, if there are a greater number of buyers, new units are created and, if there are a greater number of sellers, units are cancelled. Usually this situation causes fund managers few problems – they simply buy or sell shares to reflect the inflows or outflows of money. When dealing in physical property, the situation is far more difficult. Yields also are not particularly exciting.
Similarly, investment trusts are not immune from liquidity issues. Admittedly, managers of closed-ended funds aren't forced to complete quick-fire sales when faced with outflows. Yet I believe they are faced with a different issue. Many trusts offering an attractive income, such as some infrastructure funds, are currently trading on huge premiums to their net asset values. Therefore, any setbacks here will feed straight to trust prices – losing big premiums can prove very unpleasant indeed.
To conclude: be cautious of stories on wider economic issues in the press. After all, they have to write about something, and doom and gloom always seems to sell better.
Keep a decent portion of your portfolio in cash, to cover those short-term expenses and emergencies. Cash deposit may offer a low rate of interest, but its advantage is that it's the most uncorrelated asset class available. For investors seeking a traditional, long-term yield story, look no further than equity income. I admit I fear for those who are in alternative income products. It's these types of products that get hammered in a stock market sell-off. Not that I am predicting one; everyone else is doing a great job at that.
Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more details about the funds included in this column, visit www.hl.co.uk
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