Stay invested and don't run away from stocks

Published December 7, 2011

Europe will find a way out, so ignore day to day volatility, says Barclays Wealth

By GENEVIEVE CUA

MARKET volatility is distressing for investors, but Barclays Wealth chief investment officer Aaron Gurwitz is telling clients to stay engaged and invested in equities.

He believes Europe will find a way out of its crisis, and in the meantime the political machinations and market swings are 'spectator sport'.

'(Europe) is not going to deteriorate to a catastrophe, but it's not going to get solved very quickly. It is going to be a source of volatility and risk for some time to come.'

'I tell clients . . . to look beyond the day to day volatility. It's about the slight increase or decrease in the probability of a very unlikely event.'

Europe, he says, may dip into recession, which may be 'mild and relatively brief'. Even so, the impact of slower growth in Europe on the rest of the world is unlikely to be severe due to the relative size of Europe's economies. This is in contrast to the effect a US recession would have. The US, on the other hand, is showing signs that it may well avoid a recession.

He believes the pervasive fear in the market is overdone.

Data from EPFR Global shows continued outflows from risk assets such as emerging markets and Asia ex-Japan equities. Year-to-date outflows at US$20 billion are edging close to the inflows of US$21 billion in the January to November period last year.

EPFR said redemptions from emerging Asia funds occurred despite China's shift to looser monetary policy to sustain economic growth. China equity funds ended the month of November with their biggest outflow in eight weeks as some respected fund managers raised fresh questions about the health of the country's banking system.

Mr Gurwitz remains sanguine about China. 'Whether (China) dips below 8 per cent growth, I'm not all that worried . . . Unlike policymakers in developed countries, policymakers in China have plenty of things they can do . . . It's not going to be a hard landing.' These tools include cutting interest rates, easing credit and raising government spending, for instance.

'Our message is, don't run away from the markets; stay involved. Build a diversified asset allocation and have some equity exposure. The private sector around the world is doing very well. The bad news is about the public sector . . .

'The global economy is growing . . . profit margins are expanding. The default rate is very low, bond yields are very wide. In emerging economies it's business as usual. So try your best to ignore the day to day volatility.'

Among asset classes, his preference is for developed market equities as valuations are attractive and they benefit from growth in emerging economies.

Simple diversification, he says, should help to cushion a portfolio against swings in the market. Among fixed income assets, he favours high quality long-term government bonds which will fare well if interest rates stay low. These include US Treasuries, gilts, Canadian and Australian bonds. Clients should also have a diversified portfolio of emerging currencies, which can be obtained through local currency emerging bonds. Put options on equities have become expensive, but investors should consider buying puts when prices drop.

He believes gold, however, doesn't help to reduce portfolio risk. ' . . . gold's correlations are not reliable. There are times when it seems that the world is coming to an end and gold does poorly with some frequency. It's not a safe haven asset, it's more volatile than equities.'