Market Commentary: 19 August 2011

Riding the waves with the big grizzly

Tactical moves from the Close Asset Management investment team

 

It is clearly unnerving - observing share prices plunge left, right and centre; and it is pragmatic to remain cautious about the fragile state of the western world. Our view is that the volatility will continue as the western world continues its painful process of deleveraging.

In contrast, we find Emerging Markets (EM) undergoing more of a normal business cycle slow down in response to prudent tightening measures. EM is at a different point of the economic cycle, structurally stronger and undergoing a cyclical slowdown, where the tightening cycle is nearing its peak.

At the micro level, we believe companies in general are in a far healthier state than their macro counterparts in the western world and while decelerating economic activity may hurt earnings in the quarter to come, valuations, while not excessively cheap, are attractive given the steep declines in markets over the last few days.

We also believe that given the severity of the move in financial markets over the last few days and the need to remove systemic financial risk, avert a double dip and restore confidence, policy makers are more likely to act with further unconventional measures or policy accommodation.

Given the above, our decision is to embark on the following tactical moves:

Equities - We think that equities remain the best of a bad bunch in asset class comparison, and are more likely to outperform over the medium term. In particular, high quality companies with excellent cash flow, good market position and Emerging Markets growth exposure. But, avoid financials - while bank stocks are in the main trading at or below book value, we continue to find the amalgam of regulatory, balance sheet and return risk, too unquantifiable to properly analyze; we will remain underweight in this area.

Gold - We're maintaining our preference for gold. We believe that an overweight exposure to gold, and other precious metals, offers a hedge against a faltering cyclical recovery or any unforeseen event risk and also provides a store of value in a currency debasement world.

Restricting corporate bond holdings to companies with a more cautious business orientation and more stable cash flows; strong balance sheets, high and sustainable dividend yields and large market positions in their particular business area, e.g. tobacco, utility and telecoms companies.

We may well have entered a longer term structural bear market, but believe that markets will trade higher in the near term given the magnitude of the decline and the likelihood of policy response.

This information is provided solely to assist you in making your own investment decisions and does not constitute an investment recommendation. Any views expressed do not constitute investment advice or research and are subject to change. Close is providing general information about investments, markets and macroeconomic themes which do not constitute advice or a personal recommendation for which we would owe you a duty of suitability. If you need advice to determine whether an investment is suitable for you, you must consult a suitably qualified adviser.