MLC on the sell off in equities

Funds Management

by Clive Tompkins

MLC Chief Investment Officer, Jonathan Armitage talks to MLC Research Manager Rebecca Collins about the sell off in equities during October and the benefit of using a mix of different investment styles within asset classes.

Rebecca Collins: Hello and welcome my name is Rebecca Collins, Research Manager for MLC. Today I’m joined by Chief Investment Officer, Jonathan Armitage. Thanks for joining us Jonathan.

Jonathan Armitage: Thank you.

Rebecca Collins: It’s been a wild ride for investors coming into October. What’s behind the recent market volatility?

Jonathan Armitage: I think as always there are a couple of reasons, there’s never one very strong driver to market volatility. So I think what we’re seeing is one of the factors that’s been going on, really for sometime now is the withdrawal of liquidity, as central banks look to normalise monetary policy. We’re seeing that in the US and also seeing it follow through, in markets like the UK and also Europe. And some estimates have suggested that nearly $0.5 trillion have been removed from monetary stimulus, really since March this year.

What we’re also seeing is that forward earnings estimates are coming under a little bit of pressure, particularly markets in the US. It’s been an extraordinary period for earnings growth for corporate profits in the US. And I think what you’re seeing is markets and investors reappraising what those growth prospects look like, as we move into 2019. I think we’re seeing a couple of factors impacting earnings. The first one is that wage increases are coming through in a large number of parts of the US economy. And that’s going to impact margins as we go into 2019.

The second impact is that corporate America has been a huge beneficiary of the tax reductions, which the Trump administration announced at the start of this year. That’s very much a one-off benefit and so as we move into 2019, that one-off benefit is going to dissipate. I think one of the other things that we are definitely seeing investors react to is some of the geopolitical pressures. And specifically that revolves around tariffs. Although there’ve been a number of announcements, we’ve really yet to see tariffs bite, particularly between China and the US. But I do think that investors are starting to become more concerned about what that really means for corporate earnings going into the future.

So a number of different drivers as to why we’re starting to see volatility emerge. And I think the backdrop to this has been that equity valuations in a lot of particularly developed economies, have been particularly high and so the margin for error has been quite low.

Rebecca Collins: So growth prospects are changing. What does that mean for markets?

Jonathan Armitage: It’s a really good question and I think one of the things that we’re starting to see, in terms of the dynamics within markets, is a shift from a real focus on very strong earnings growth and the companies that benefit from that. And that’s been particularly true in areas like technology, to more of a focus particularly in equity markets, around valuation and a focus in what’s known as value stocks. We’ve certainly seen those dynamics change in the last six weeks or so. And we think that given the real dichotomy between valuations in different parts of equity markets, that that has got further to play out.

That’s important for us as investors in multi asset funds. Not just for the diversification that we see between individual asset classes, but also within specific asset classes. It’s one of the reasons why, when we look at constructing equity portfolios, we have real diversification in the types of managers that we use. Whether or not it’s in global equities or Australian equities. We believe that value investors who’ve had quite a tough time of it recently, will actually start to see some strong outperformance, as valuation really becomes much more a greater focus and a stronger driving factor, within equity markets.

Rebecca Collins: So diversification is important at the asset class level, as well as at the portfolio level?

Jonathan Armitage: Absolutely and it’s very much at the heart of the way that we construct our portfolios for clients.

Rebecca Collins: Thanks for your thoughts today Jonathan and thanks for joining us.


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