Ashburton: View on current bond and equity markets

Peter Lucas, Global Strategist, offers his views on current bond and equity markets and Ashburton’s investment strategy:

Long-Term View

Our long-term view remains that equities are the cheapest of the major asset classes and that the bull market will resume once this correction has run its course. If commodities and equities break down significantly, thereby signalling that the current debt crisis is evolving into something more sinister, then we will reassess this position but as of today we remain cautiously optimistic.

Short-Term View

A few weeks ago we were concerned about several negatives that were lining up against equities: rising bond yields, the high oil price and elevated investor confidence. We therefore took protective action, adding to our bond positions and hedging some of our equity positions, a decision that was vindicated by the ensuing market storm.

In the past few weeks the negatives for equities have ameliorated: US bond yields have fallen over 0.6%, the oil price has dropped 12% and investor sentiment has become quite despondent (which is positive from a contrary point of view). As a result, we have slightly increased the risk profile of our portfolios and funds, selling long-dated bonds and closing some of our equity ‘hedges’ but the overall thrust of strategy is still pretty neutral.

In the last couple of days equity markets have relapsed, following a short-lived recovery, as tightening conditions in the credit markets have claimed more victims, particularly in the hedge fund arena. Nonetheless, we feel the weight of evidence supports our current strategy. Indeed, we expect markets to bottom around current levels and enjoy a period of relief lasting a week or so. As of today we believe that we should be looking to use that recovery to batten down the hatches a little but we will assess the situation when we get there.

Of course, if the evidence strongly suggests that a less optimistic scenario is unfolding we will tailor our strategy accordingly.

Performance of the Regional Equity Funds

The relative performances of the Americas and European Equity Funds have held up pretty well in these difficult market conditions. Both Funds have been underweight in the troubled financial sector and have instigated derivative strategies to protect capital. The Americas Fund has had the added benefit of having reduced its overweight in cyclically sensitive basic materials shares in favour of more defensive investments. The Asia Pacific and Chindia Equity Funds have found the going a little tougher. With big profits under their belt, it would appear that investors are using the region as a source of funds during the recent period of turbulence. However, we remain confident that the region’s economies and markets will continue to thrive in the long-term, even in the face of the problems of the US property and credit markets. All the Funds have cash on the sidelines awaiting an attractive re-entry point into the markets.