John Birkhold, partner at the global equities investment manager said the rise in global equity markets in the past five years has been the result of normalisation following the GFC.
“Investors who have weathered the freefall and subsequent volatility have seen their equity investments rise on a per annum basis in the order of 10 to 12 per cent since the GFC market lows,” said Mr Birkhold.
He believes in this ‘normalised environment’ investors should continue to favour equities over other asset classes “due to the substantial premium they offer”.
“The trade-off is that they must accept equity volatility," he said.
“That doesn’t mean buy and hold at all costs or not selling overvalued stocks, but it does mean stomaching fluctuations and understanding that it’s the price you pay for the performance premium equities have historically provided.”
Mr Birkhold also warned that focusing on prevailing opinion as opposed to hard evidence can be perilous for investors.
“It is well-known that when views about certain regions or sectors take hold, markets can overshoot as investors take their eye off of current fundamentals, which leads to periods of volatility,” he said.
Mr Birkhold gave the example of the strong investor interest in emerging market stocks in the post-GFC period.
“Many investors favoured the region at the expense of developed markets in order to try and capitalise on perceived superior GDP growth prospects,” he said.
“What investors failed to identify was that many emerging market companies were overspending and accepting incrementally lower returns on their investments.”
Mr Birkhold said regardless of prevailing market sentiment, “achieving strong performance in equity markets remains a case of evaluating available evidence, and not being unduly influenced by perceived market trends or popular opinion about likely winners or losers”.
“Equities continue to offer opportunities for reasonable returns, but investors must take a long-term view, which means maintaining a focus on what is likely to drive wealth creation over time, while understanding that periods of short-term volatility are inevitable,” he said.
