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Political and security concerns have dampened investor enthusiasm in recent weeks and opened up an opportunity for those who like to trade against the herd, says Royal London Asset Management (RLAM).
The RLAM ‘contrarian sentiment indicator’ has pointed to its first ‘buy’ signal since the French elections in April, when investors were spooked by the idea of far-right National Front candidate Marine Le Pen gaining power.
Previous triggers have included Chinese currency devaluations in 2015 and 2016, and more recently Brexit and the election of Donald Trump as US president.
This time geopolitical concerns around America's stand-off with North Korea, controversy over President Trump's comments following the Charlottesville protests and the terror attacks in Spain that worry investors.
Trevor Greetham, head of multi-asset funds at RLAM, said that after months of calm ‘investors are starting to get rattled’ but despite the unease now could be the time to add to positions in equities, or shares.
‘It pays to buy when others are fearful and we are starting to add to the equity positions in our multi-asset funds, increasing our overweight positions there,’ he said.
Just under 70% of Greetham’s recently launched Royal London Global Multi Asset Portolio (GMAP) Adventurous fund is invested in equities. In the 12 months to the end of June the fund returned just over 16% putting it slightly behind the 16.14% average of funds in the Investment Association Mixed Investment sector.
Greetham shrugged off concerns about overstretched valuations making stocks look expensive.
‘Stocks have performed strongly over the last 18 months and valuations are starting to get a bit stretched, but macro-economic fundamentals remain supportive with global growth continuing at a reasonable pace, inflation pressures easing and interest rates low.’
The RLAM sentiment indicator tracks global markets and investor behaviour back to 1990 and looks at four components:
Taken together, a sentiment indicator reading can be calculated and once that reading falls below -1, as it has done, can indicated a good time to invest.
Hermes Investment Management global equities portfolio manager Louise Dudley sounded a note of caution. She said the ‘storm of political uncertainty’ seen lately has contrasted with the VIX equity volatility index, which has hit new lows as equity markets have reached record highs.
‘In this environment of great uncertainty and lack of market leadership, investors acting on macro forecasts must not only be correct about the anticipated event, but also about how the market will reach to it – which as we know following the UK’s EU referendum and the extended Trump rally, can be just as unpredictable to commentators,’ she said.