DFM Manager review for 2016

DFM Manager review for 2016

It has certainly not been a good start to the year in markets, but,  from a global economic perspective, there’s no “new news” as far as we’re concerned.  Bearish sentiment relating to China has all got a bit out of hand in the short term in our view: their transition from an export-led economy to one driven by domestic consumption was never going to be a smooth one and we’re merely seeing the consequence of that in the data.  At present the current “rampant pessimism” (as a manager with whom we had a conference call yesterday, put it) is the result of too much focus on the negative data and nothing on the good numbers - there are some!  We continue to believe that the country’s GDP  is in a gradual (and entirely expected) downward glide path, rather than headed for a hard landing.  

 

Big market moves are very often seen at the beginning of the calendar year, as strategists and traders try to justify their existence by setting out their new views for the next 12 months, but in my experience these tend to be short-term in nature.  That’s not to say we aren’t alert to the possibility of a significant deterioration in the economic backdrop, but that’s not our base case scenario.  If I’ve interpreted it correctly (and I have seen the full piece), RBS are talking about the bond markets in the main, where we’ve been underweight and defensively positioned for ages (we also have very little Emerging Market exposure). 

 

We see as many things to be encouraged by around the world (US growth, recovery in Europe, very healthy M&A activity) as there are to be fearful of (China, EM in general, commodities).  That flipping between “glass half-full” and “glass half-empty” is a symptom of that.  As we’ve been saying for a long time, we expect volatility to remain a feature in markets for the foreseeable future, but a 2008-style scenario?  I don’t see it – that was mostly to do with the failure of the financial system and the rebuilding process that’s taken place means that’s not going to happen again.   It’s also worth bearing in mind that, while weakness in oil and commodities prices is undoubtedly harmful to the economies of those countries that produce them, it’s also a significant boost to consumers in those that are net importers (akin to a healthy tax cut in the US and Eurozone) and in particular for the low paid with a high propensity to spend. 

 

In terms of our response to market movements, we have re-risked a little within the equity portion of our models, but not significantly.  In the case of most of our portfolios, we have been holding back on investing further into our preferred (defensive) bond funds and in property, so are holding a >25% cash position.  At this point, we’re happy to hold on to this “dry powder”, but monitoring events with an eye on potential opportunities.  Quite a few of the managers we invest with have also throttled back within their funds during the final quarter of last year, which has further reduced overall risk.