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The market stands corrected. After a strong beginning to the year in the US, and a boom year in many of the emerging markets, returns came hurtling down last month. The adage about “selling in May” seemed particularly accurate.
There is still room for differences of opinion about the long-term direction of the market. While share prices have corrected themselves, it is not clear that the correction is over.
FTWealth spoke to a range of market analysts and wealth advisors to try to gauge opinion about exactly where assets should best be deployed, and where the risks and opportunities are now to be found.
Jim Paulsen, chief investment strategist at Wells Capital Management, suggested much depends, as ever, upon the Fed’s next decision this month. “I think the stockmarket will go gangbusters if the Fed stops [raising interest rates in June]. I’m a little scared, but my gut tells me that this sell-off of the last month had less to do with the economy downshifting than the trends that were in play in the last six weeks letting up.”
He favours stocks relative to bonds, and believes commodities have gone “ahead of what a healthy economy can sustain”. Looking forward, he describes the last month as “a pause that refreshes” more than anything else, and remains bullish. “If you were overweight in consumer cyclicals, I would stay there; if you hadn’t been, I would go there. I wouldn’t take this opportunity to go to the defensive sectors that everyone is talking about.”
I think this is more a pause that refreshes than a pause that is a marker of a change in leadership.”
Hugh Johnson, chairman and chief investment officer of Johnson Illington Advisors, is more circumspect: “It’s very hard because we may be at a turning point, we may be moving from a bull market to a bear market. I don’t know which it is, however, right now, it’s still a bull market.”
If it is a bull market, he also sees buying opportunities in consumer cyclicals – anything from retail to publishers, to the likes of Lowe’s or Home Depot – industrials, and technology.
If we are truly heading for a bear market and stagflation, he suggests consumer staples and healthcare as defensive sectors.
Todd Salamone, senior vice president of research at Schaeffer’s Investment Research, suggests keeping a big cash position, and choosing sectors that have displayed leadership when investing – such as the small-caps, which have still performed dramatically better than the mega-caps so far this year.
Is this correction over? He says the latest sell-off returned the market to a trend line: “That’s a trend line that has been tested a couple of times now and has held.”
Barry Hyman, equity market strategist at Ehrenkrantz King Nussbaum thinks the S&P 500 will end the year at 1280 (virtually where it is now), and has raised cash somewhat by moving from a 50 per cent weighting in stocks to 45 per cent.
While some areas of technology – a sector that has seen a particularly brutal sell-off – look interesting, he says, “we’re getting a bit more defensive”. That means the consumer sector and healthcare, and avoiding cyclicals. He does, however, expect a shift from small caps to mid- to large-caps.
Marc Pado, chief market strategist at Cantor Fitzgerald, said he had expected a correction. “If we can maintain a little price stability, it will do well for building a base.”
“The tech names don’t have enough of a base to make them buys,” he said. In terms of opportunities, he somewhat unfashionably looks abroad, as “we’ve seen most of the damage we’ve been expecting in foreign markets”.
Elizabeth Weymouth, Global Investment Specialist at JPMorgan Private Bank, suggests the greatest advantages could come from the return of volatility, which, she says, is not “spiking”, but returning to normal. Since April, she has reduced clients’ overall equity allocation from 26 to 21 per cent – because of a falling trend in corporate profits, where she expects rises to be below the 10 per cent mark. She has also underweighted small-caps in anticipation of the much-awaited end to the small-caps boom.
She says higher volatility is leading to “better pricing for our clients” in structured products, and has made downside protection more attractive. Her allocation to alternative assets has gone from 22 to 25 per cent, the increase being all in hedge funds, which with volatility should be in a position to deliver out-performance. Most of this is in funds of funds. JPMorgan is also maintaining a 5 per cent allocation in private equity, another possible safe haven since the money funds are raising will not be deployed until next year.
Rich Honeck, investment strategist for Bank of America’s family wealth advisers, which only handles those with $50m or more to invest, says there is a move towards greater diversification, and towards hard assets. “One of the things they’re focused on is timber investments – it’s a good non-correlated asset. The key here is protecting their wealth in a choppy market. It’s a good market for timber, real estate, and oil and gas equities and exchange-traded funds.”
The hedge-fund strategies that most interest him include long-short equity and event-driven strategies to protect the downside and also, perhaps surprisingly, global macro – as people still want to globablise their portfolios. The biggest change is that long-only equity portfolios are now swinging towards large-cap names, in recognition of their superior valuations after the small-cap rally.
But there is one other advantage. If the important consideration is to protect against the downside, the high correlation between different assets during the last five years has been a problem. “We’re focused on low correlated assets,” he says. “In the last three to five years everything has gone up and asset classes have had more correlation. Now that’s going to change.”
Lori Heinel, of Citigroup Private Bank, said the correction “hasn’t really influenced our thinking at all”. As at the beginning of the year, Citi is overweight equities relative to bonds, and overweight developed markets outside the US.
She remains neutral about emerging markets where she says there “isn’t much upside” in relation to the risks involved. Nothing has happened to change any of these positions, and Citi’s belief that the dollar will weaken further serves to strengthen them.
“Clients are more likely to ask for structured products,” she says. “Generally speaking when you want exposure to a market, the play with the most upside tends not to have that guarantee. If I was to look at a straight recommendation, I’d tell clients to go directly into that market. But there has been more asking.”