Navigation Search
Close

Select your location and role to view strategy and fund content

United Kingdom
  • Global homepage
  • Australia
  • Botswana
  • Denmark
  • Deutschland
  • España
  • Finland (Suomi)
  • France
  • Hong Kong (香港)
  • Ireland
  • Italia
  • Luxembourg
  • Namibia
  • Nederland
  • Norway
  • Österreich
  • Singapore
  • South Africa
  • Sweden (Sverige)
  • Switzerland
  • Taiwan (台灣)
  • United Kingdom
  • United States
  • International
Professional Investor
  • Professional Investor
  • Individual Investor

Tailored for investment professionals this site provides information on our products, strategies and services. Please remember capital is at risk and past performance is not a guide to the future.

By entering you agree to our Terms & Conditions

Login to My Investec

  • Market review

    Market review

    Download PDF Indicator

    The third quarter was bookmarked by contrasting central bank rhetoric at the beginning and end of the period

    Growth assets performed strongly over the quarter following a relatively uneventful summer period. For the third quarter in a row, all the major equity markets generated positive returns, with emerging markets and Asia Pacific equities again leading the way. Japanese equities, supported by strong economic data, and US equities, driven by the technology and energy sectors, followed closely behind. European and UK equities were firmly positive but lagged relative to the other markets given the appreciation of the euro and sterling respectively. High yield bonds yet again churned out another reasonable quarter, while both local and hard currency emerging market debt continued their strong run this year. Property securities globally also generated decent returns, as did commodities.

    The third quarter was bookmarked by contrasting central bank rhetoric at the beginning and end of the period, leading to government bonds yields broadly finishing at similar levels to where they started. Indications about a move away from ultra-loose monetary policy made towards the end of second quarter were softened at the start of the third quarter. This led to a gradual decline in global government bonds for most of the period. However, yields spiked back up towards the end of September as both the US Federal Reserve (Fed) and Bank of England (BoE) reintroduced the prospect of near-term interest rate hikes. The US dollar again underperformed a broad basket of currencies, including the majority of G10 currencies, with the Japanese yen also depreciating against most currencies over the period.

    Within Uncorrelated assets, gold experienced a volatile but ultimately positive period of performance. Infrastructure suffered a sharp drawdown at the end of September based on concerns around the potential impact of a changing political backdrop, losing the majority of the returns it had accumulated earlier in the quarter.

    At a glance - our asset class views

    -- - o + ++
    Equities
    North America  
    Europe ex UK  
    UK  
    Japan  
    Asia ex Japan  
    Emerging markets  
    -- - o + ++
    Government Bonds
    North America  
    Europe ex UK  
    UK    
    Japan  
    EM Hard Currency    
    EM Local Currency  
    IG Corporate Bonds    
    HY Corporate Bonds  
    -- - o + ++
    Currencies
    US dollar  
    Euro  
    Sterling  
    Japanese Yen  
    Asia ex Japan  
    Emerging Markets  

      View for the coming 6 to 12 months* Previous quarter's view

    *Views of Investec Asset Management’s Multi-Asset team and reflect preferences within respective asset class. As at 30.09.17.

    Key themes for coming 6-12 months

    • Robust global economy – our models indicate a relatively small risk of recession over the next 12-18 months.
    • Government bonds retain Defensive characteristics – Diversification properties against Growth assets intact given low risk of inflation.
    • Market ‘melt up’ reasonably likely – while many asset classes are expensive, positioning is not overly extended.

     

     


    Multi-asset portfolios are subject to possible financial losses in multiple markets and may underperform more focused portfolios.

    Important Information

    The information may discuss general market activity or industry trends and is not intended to be relied upon as a forecast, research or investment advice. The economic and market views presented herein reflect Investec Asset Management’s (‘Investec’) judgment as at the date shown and are subject to change without notice.There is no guarantee that views and opinions expressed will be correct, and Investec’s intentions to buy or sell particular securities in the future may change. The investment views, analysis and market opinions expressed may not reflect those of Investec as a whole, and different views may be expressed based on different investment objectives. Investec has prepared this communication based on internally developed data, public and third party sources. Although we believe the information obtained from public and third party sources to be reliable, we have not independently verified it, and we cannot guarantee its accuracy or completeness. Investec’s internal data may not be audited.

    Indices are shown for illustrative purposes only, are unmanaged and do not take into account market conditions or the costs associated with investing. Further, the manager’s strategy may deploy investment techniques and instruments not used to generate Index performance. For this reason, the performance of the manager and the Indices are not directly comparable.

    MSCI data is sourced from MSCI Inc. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, endorsed, reviewed or produced by MSCI. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.

    If applicable, FTSE data is sourced from FTSE International Limited (‘FTSE’) © FTSE 2017. Please note a disclaimer applies to FTSE data and can be found at www.ftse.com/products/downloads/FTSE_Wholly_Owned_Non-Partner.pdf

  • A letter from your PM



    Idiosyncratic positions: looking beyond the label

    - A letter from Philip Saunders

    Philip Saunders

    The experience of the 2000-2002 bear market, when global equity indices fell around 50%, amounted to a hard lesson in the importance of diversification. In addition, it highlighted the folly of excessive reliance on a single asset class: equities. This experience continues to influence strategic asset allocation decisions today. The pursuit of less-correlated returns, and less variability in future returns, not only increased interest in alternative investments but also created enthusiasm for what have come to be known as ‘idiosyncratic’ exposures. After all, what is not to like about ‘equity-like’ returns which have low correlations with the major asset classes and, as such, reduce the variability of portfolio returns? Conceptually, this is very appealing.

    The first wave of this enthusiasm focused on hedge funds, often purchased through funds of hedge funds, the argument being that their anticipated return characteristics and the diversification benefit that they supposedly offered, justified their high fees. In order to create a differentiated return profile they made extensive use of ‘relative value’ positions which attempt to capture the outperformance of one asset relative to another related asset. Unfortunately, the actual experience fell well short of the theory. Both returns and correlation characteristics were generally disappointing. However, the search for sources of idiosyncratic returns went on and the next major beneficiaries of investor enthusiasm were multiasset absolute return strategies. These were lower cost, more liquid and transparent, up to a point, than hedge funds. Again, these funds were heavily reliant on relative value positions and seemed to be able to deliver acceptable return outcomes with much less directional exposure and with the promise of modest drawdowns. Despite their strong (and timely) conceptual appeal, especially after the sharp fall in global equity markets suffered in 2008, such strategies were relatively unproven. Another example of the triumph of hope over experience. Although it can be argued that such funds have displayed less correlation with equities, the level of returns has been disappointing. Alpha is mercurial and challenging to deliver consistently at the best of times and it would appear that the return objectives of the liquid multiasset absolute return strategies may have been set unrealistically high. It is particularly unfortunate for many clients that this dawning realisation is coming after a period during which the more conventional strategies have delivered strong returns and the consequent opportunity cost has been uncomfortably large.

    We believe that well executed idiosyncratic positions are additive in broader diversified growth portfolios, but in order to meet investors’ return expectations they have to be combined with, albeit variable, exposures to a range of market risk premia. We also believe that it is important to look beyond asset class labels. Some make the naïve assumption that certain labels will bring with them uncorrelated returns. We strictly categorise our relative value positions in terms of their prospective correlation characteristics as ‘growth’, ‘defensive’ and finally, genuinely 'uncorrelated' exposures in times of market stress. We also pay particular attention to how they are likely to relate to each other in such circumstances.

    Another common mistake is to focus on individual positions and not see the bigger picture at the overall portfolio level. A simplified security-level view can miss the use of portfolio hedges which can provide a positive skew to returns and thus increase diversification to major asset class betas in the event of a market fall. It can also miss relationships between seemingly unrelated positions. For example, allowing an economic view to dominate — through a series of seemingly unrelated positions — reduces diversity and can have material negative consequences for returns. This is precisely why we combine top-down macro views with the analysis of security-specific bottom-up drivers. Indeed, in our view, a well-constructed portfolio should be multi-layered, benefitting from a high level of integration and, as such, is generally not capable of being described as a series of individual positions.

    Philip Saunders
    Co-head of Multi Asset Growth

  • Equities

    Equities

    -- - o + ++
    Equities
    North America  
    Europe ex UK  
    UK  
    Japan  
    Asia ex Japan  
    Emerging markets  
    Japanese equities remain one of our core themes

    North America

    -- - o + ++
    North America  

    While US equity valuations are relatively stretched, the fundamental backdrop remains positive and helps justify these levels. Broadly, US equities continue to offer high quality. The Fed’s rate hiking path and forward guidance around balance sheet reduction have also been steady, without being too destabilising.

    We retain our preference for high-returning companies with earnings visibility that appear cheap given their cashgenerating abilities.

    Europe ex UK

    -- - o + ++
    Europe ex UK  

    Fundamentals are continuing to improve with strong sales growth and a generally more supportive macroeconomic backdrop for the euro zone. Valuations do not yet appear a constraint to further upside.

    Longer term, any normalisation from the European Central Bank (ECB) through tapering is a potential headwind, while political risks from countries such as Spain and Italy do remain, albeit somewhat more contained.

    UK

    -- - o + ++
    UK  

    We retain our neutral stance towards UK equities. Fundamentals and valuations alike are mixed with the former looking more favourable in areas like homebuilders, while areas like media and retail appear relatively cheap. However, neither appear overly compelling.

    The uncertainty around Brexit negotiations lingers, and evidence has emerged of more significant concerns for the real economy as inflation continues to rise.

    Japan

    -- - o + ++
    Japan  

    Japanese equities remain one of our core themes. Valuations continue to appear attractive and fundamentally there are strong stock buyback trends providing attractive opportunities at the company level. We are focused on companies with improving profitability driven by ‘self-help’ initiatives including capital efficiency.

    Longer term, yen strength is a concern although it would take a meaningful move higher from current levels for this to become a significant hindrance.

    Asia ex Japan

    -- - o + ++
    Asia ex Japan  

    Fundamentals are still weak relative to other emerging markets and structural issues continue to act as a constraint.

    In China, we have pared back our conviction somewhat, although we continue to look for companies that stand to benefit from the country’s reforms, economic rebalancing and supportive valuation.

    Emerging markets

    -- - o + ++
    Emerging markets  

    Valuations have normalised somewhat across emerging market equities after a protracted period of looking relatively attractive. Fundamental momentum has also weakened, although there are no real signs of any significant strain.

    We note that price momentum is falling across regions, particularly areas like Latin America, emerging Europe, the Middle East and Africa.

      View for the coming 6 to 12 months* Previous quarter's view

    *Views of Investec Asset Management’s Multi-Asset team and reflect preferences within respective asset class. As at 30.09.17.

  • Bonds

    Bonds

    -- - o + ++
    Government Bonds
    North America  
    Europe ex UK  
    UK    
    Japan  
    EM Hard Currency    
    EM Local Currency  
    IG Corporate Bonds    
    HY Corporate Bonds  
    We view US Treasuries as one of the cheaper areas of the developed market government bond space

    North America

    -- - o + ++
    North America  

    We view US Treasuries as one of the cheaper areas of the developed market government bond space. While the US continues to recover steadily and the Fed is slowly normalising monetary policy, much of this is already priced into US Treasuries, particularly further out along the curve.

    An unexpected bout of second round inflationary pressure (prices and wages moving higher together, accelerating inflation) or large unfunded tax cuts could however still see upward pressure in yields.

    Europe ex UK

    -- - o + ++
    Europe ex UK  

    With the euro-zone economy improving and the ECB likely to taper, yields are unlikely to fall much lower and appear relatively expensive.

    However, the main tailwind which could support euro-zone bonds is inflation. We believe markets are overestimating the uptick in inflation and we expect this to fall back in coming months with core measures still challenged.

    UK

    -- - o + ++
    UK    

    Shorter-dated UK Gilts appear relatively cheap. While the BoE has recently adopted a more hawkish stance as higher inflation continues to be a concern, we expect a less aggressive rate hiking profile than financial markets.

    We are more cautious about longer-dated Gilts which appear susceptible to looser fiscal policy, against a backdrop of a vulnerable economy.

    Japan

    -- - o + ++
    Japan  

    The Japanese government bond market remains largely dominated by the Bank of Japan (BoJ) with measures such as direct yield targeting limiting the scope for yields to move either way in the short term.

    We are neutral on Japanese government bonds. The market is slightly cheap but is dominated by the actions of the BoJ.

    Emerging Markets Hard Currency

    -- - o + ++
    Emerging Markets Hard Currency    

    Opportunities exist for more growth orientated, shortduration names and demand from institutional investors remains high. However, valuations are somewhat stretched and are less attractive relative to both local currency bonds and their own history.

    The Fed’s rate hiking cycle presents some challenges for hard currency debt, particularly as inflationary pressures pick up and greater protectionist policies from the Trump government.

    Emerging Markets Local Currency

    -- - o + ++
    Emerging Markets Local Currency  

    Broadly speaking, we are constructive on the outlook for the emerging market local currency bonds, particularly in currency hedged terms. In several key markets, we see a positive cyclical and structural inflation story which should prove supportive.

    Investor flows have also been very strong of late, and the broader market does not appear too heavily owned opening the scope for this to continue further.

    Investment Grade

    -- - o + ++
    IG Corporate Bonds    

    The nearer-term fundamental outlook appears positive with central bank support still helping to underpin the market. Valuations are starting to look increasingly expensive, especially in Europe driven by the ECB corporate bond buying programme.

    Caution is warranted as upward yield pressure on government bonds could subsequently put pressure on the asset class, particularly as the Fed continues to hike interest rates, although this subsided somewhat over the quarter.

    High Yield

    -- - o + ++
    HY Corporate Bonds  

    The outlook for high yield credit remains relatively constructive, on balance. Fundamentals are robust with strong secondquarter earnings, while default rates in the US continue to fall to new lows. Market technicals remain supportive with supply and demand well balanced, and a possible extension of the credit cycle as investors continue to ‘reach for yield’.

    However, valuations are looking increasingly expensive having rallied further over the quarter.

      View for the coming 6 to 12 months* Previous quarter's view

    *Views of Investec Asset Management’s Multi-Asset team and reflect preferences within respective asset class. As at 30.09.17.

  • Currencies

    Currencies

    -- - o + ++
    Currencies
    US dollar  
    Euro  
    Sterling  
    Japanese Yen  
    Asia ex Japan  
    Emerging Markets  
    Japan’s economy is showing increasing signs of optimism, while the yen is very cheap

    US Dollar

    -- - o + ++
    US dollar  

    While the US dollar remains underpinned by robust economic growth and tightening monetary policy the currency remains relatively expensive, although less so than at the beginning of 2017.

    The currency could see a short-term bounce, but we believe much of the aforementioned tailwinds are in the price and other opportunities elsewhere appear more attractive.

    Euro

    -- - o + ++
    Euro  

    We are neutral on the euro, with the positive and negative cases firmly balanced. Faster economic growth and stillattractive valuations still support the currency, although current investor positioning is very long.

    More broadly, medium-term risks lie to the downside due to structural concerns about weak inflation and wages, where any upside pressure has typically been fairly limited and transitory.

    Japanese Yen

    -- - o + ++
    Japanese Yen  

    Japan’s economy is showing increasing signs of optimism, while the yen is very cheap, particularly against the US dollar. The currency also remains attractive as a Defensive asset and as such, a useful hedging option for our portfolios.

    There are several events which could trigger a meaningful appreciation in the yen over the coming months, including a snap election, Bank of Japan tapering or an escalation in political tensions with North Korea.

    Sterling

    -- - o + ++
    Sterling  

    Sterling remains very cheap and continues to be shunned by many investors. Investor positioning is biased towards further declines and the economy appears vulnerable.

    Given the ongoing uncertainty regarding Brexit negotiations, our preference is to tactically position ourselves when the currency approaches the end of a range.

    Asia ex Japan

    -- - o + ++
    Asia ex Japan  

    Asian currencies still look particularly vulnerable to further downside. The Chinese renminbi currently flags as one of the most expensive in our universe, and we expect this to trickle through into other Asian currencies.

    Many Asian economies also still appear at the peak of their financial cycles. This dynamic will likely undermine their economies and we expect the currency markets to bear the brunt of any adjustment process that will be necessary.

    Emerging Markets

    -- - o + ++
    Emerging Markets  

    Like other emerging market assets, several currencies have enjoyed a strong run of late meaning valuation is not as attractive on a broad-based level.

    In an asset class with significant regional variation, we remain positive on select, attractively valued currencies. More broadly, a synchronised global recovery in economic growth points to reduced downside risk.

      View for the coming 6 to 12 months* Previous quarter's view

    *Views of Investec Asset Management’s Multi-Asset team and reflect preferences within respective asset class. As at 30.09.17.