Taking long and short positions may be one way to alter risk relationships to achieve positive outcomes.
DO YOU EXPECT FINANCIAL MARKETS TO GET MORE VOLATILE FROM HERE?
The markets at the moment have been dealing with increasing global growth concerns, and if you couple that with the unsustainable low yields or negative yields we have around many parts of the world at the moment, this has driven market volatility over the past while to quite high levels.
If you add to that the political uncertainty – the US elections, and some elections in other areas – we would expect that market volatility will remain quite elevated over the sort of short to medium term.
EQUITYAND BOND MARKETS FEEL VERY EXPENSIVE. IS THERE STILL VALUE FOR INVESTORS?
It is true that equity and bond markets feel relatively expensive, although once again there are pockets of value. As multi-asset investors, we can access some areas of the market that your traditional managers can’t.
To give an example: relative value. Relative value is where you are long one market and short the other, and what happens with a relative value position is it gives you a different risk dynamic, or risk characteristic.
Even if markets aren’t going up in an absolute sense, you can make money out of relative value strategies by basically just getting the legs of the strategies correct.
HOW CAN RELATIVE VALUE IDEAS MAKE MONEY IN THIS ENVIRONMENT?
We see opportunities in the currency markets at present. With this growth-constrained world that we’re in, a lot of the central banks are intervening in their foreign exchange rates and we think this creates opportunity, and importantly, not only does currencies create opportunity but they allow good risk diversification.
To give you an example, if you were long the US dollar against some of the select Asian currencies, that can act as a buffer if China growth doesn’t appear the way it should be and falls – these sort of ideas offer some sort of buffer.
WHAT’S YOUR THINKING ON MORE TRADITIONAL INVESTMENTS LIKE EQUITIES?
Given the low growth environment that we’re in, valuations seem quite fair to potentially stretched at the moment. In terms of the way we’re positioned, we have equity beta at sort of very historic low levels for us. But there are some pockets of value, and we think Europe probably offers the best value. Europe seems to have less demanding valuations, and importantly there is the potential for some positive earnings surprises that we think could offer deliver better returns in these markets.
ARE THERE STILL A WIDE RANGE OF OPPORTUNITIES FOR INVESTORS?
There is some value in select parts of the traditional assets and if you can add some sort of other strategies as we discussed, like relative value, you can build quite a diversified portfolio. Currencies can add some risk diversification and if volatility does continue to be high as we expect, this can buffer the portfolio and reduce the potential downside of returns.
This communication is for Wholesale Clients only, as defined in subsection 761G(7) of the Corporations Act 2001 (Cth) (the 'Act') and must not be relied on by anyone else. The value of an investment can fall as well as rise and is not guaranteed. You may get back less than you put in. Past Performance is not a guide to future performance. The opinions expressed are those of Standard Life Investments and are subject to change at any time due to changes in market or economic conditions.
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