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Scepticism is a virtue

When faced with a crossroads in the market, it may pay to be cautious about forecasting macro, argues Ian Heslop, head of global equities at OMGI and manager of the Old Mutual North American Equity Fund

Survey: February volatility prompted 42% of investors to rethink equity strategy



Equity markets have reached an interesting juncture. There is no shortage of voices fervently advancing forecasts, both of the bull and the bear variety. Sometimes the same evidence is marshalled by opposing camps: the same data, interpreted differently, may be used to support contradictory predictions. The truth, I would suggest, is that it is difficult to forecast whether markets will rise or fall.

Markets’ rise, for the most part steady, over the past few years has been in some measure because central banks’ stimulus of the economy bled into asset prices. Now, this artificial stimulus is beginning to fade. Central banks are in the process of normalising policy. They are finally moving away from the emergency measures they found necessary to introduce during the global recession of 2008 and its aftermath.

Two sides of a coin

The withdrawal of central bank support is, of course, potentially negative for equity prices. On the other hand, the fact that central banks feel they have the manoeuvring room to normalise is in itself a positive sign. They are confident in the strength of the global economy and the progress it has made in healing from the trauma of 2008.

The US economy is undoubtedly strong, and it will be helped even more by tax cuts and infrastructure spending. The improved environment for growth should be good for equity prices. However, it could lead to central banks raising interest rates faster than investors expect, which could become a severe headwind for equities, especially given their high valuation levels.

So, there are arguments on both sides. This suggests it is sensible to be cautious about making predictions.

Measurement over macro

The Old Mutual North American Equity Fund has a top-down/bottom-up strategy and employs measurement rather than forecasting to build a diversified style-based portfolio. We have long believed that forecasting macro is fraught with difficulties. Even if the macroeconomic environment is correctly forecast, the secondary forecast, that of the market reaction, could still be mistaken. The historical record demonstrates that someone may correctly guess an interest rate move, but incorrectly forecast how the equity market will respond to it.

Rather than attempting to predict the unpredictable, we constantly monitor the market, examining it carefully and in detail for clues that indicate how investor sentiment is changing. This is the best way to detect the market movements that may result from this year’s uncertainties, in our view. When we detect changes, the portfolio will be adjusted to afford optimal positioning.

We believe that the current market uncertainty represents a good opportunity for active managers with diversified portfolios, and who look beyond indices, to add value.

Please remember that past performance is not a guide to future performance. The value of investments and the income from them can go down as well as up and investors may not get back any of the amount originally invested. Exchange rate changes may cause the value of overseas investments to rise or fall.

This communication is issued by Old Mutual Global Investors (UK) Limited. “Old Mutual Global Investors” is the trading name of Old Mutual Global Investors (UK) Limited and Old Mutual Investment Management Limited. Old Mutual Investment Management Limited, Millennium Bridge House, 2 Lambeth Hill, London EC4V 4AJ. Authorised and regulated by the Financial Conduct Authority FRN: 208543. Old Mutual Global Investors (UK) Limited, Millennium Bridge House, 2 Lambeth Hill, London EC4P 4WR. Authorised and regulated by the Financial Conduct Authority FRN: 171847. A member of the Investment Association.
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