Investment markets in 2019 are shaping up to present more potential risks than investors have experienced over the last, and more favourable, few years. This was the collective view of a panel of investment experts, who shared their insights at the IMAP Investment Forum in October.
According to Lonsec Chief Investment Officer, Lukasz de Pourbaix, the risks facing investors and investment managers over the coming 12months seem to lie in every corner of the market, including market valuation, geopolitical instability, doubts about economic growth, trade wars and liquidity.
“Through Quantitative Easing (QE), we’ve seen governments pumping a lot of liquidity into the markets. So, from a bottom-up perspective, companies have been able to easily access cheap debt. But that’s changing,” de Pourbaix said.
“And while geopolitical issues have always been around, the trade war between the US and China will have an impact on markets. Undoubtedly, the US tariffs on China will have a significant effect on the growth of the Chinese economy, which is primarily an export economy.”
Another potential risk concerning de Pourbaix is the fact that market growth has considerably outstripped value, which he believes investors have taken for granted.
“During these uncertain times ahead, investors really need to be looking more closely at portfolio and asset class diversification, including intra-asset class diversification,” he said.
It was a view supported by Antares Equities Director Institutional Distribution, Richard Close.
And while Close agreed that investors were facing potentially many risks ahead – including the North American Free Trade Agreement, China trade tariffs, geopolitical instability, BREXIT, and the Australian property market – he added that market risks were nothing new when it came to investing.
“You need to remember that markets are forward looking,” he said. “But there is always a measure of uncertainty when looking forward, and this means risk.”
Instead, he believed the major risk currently facing investors was rising interest yields, after a 36-year bond bull market.
Managing risk
But how do investment managers manage risk when that risk has yet to materialise in the market?
As a bottom-up stock picker, Close said Antares’ approach to managing risk was by having a deep understanding of the companies it invests in. “This, along with diversification and valuation, are the strongest risk management tools you can have,” he said.
Whereas Lonsec’s approach to managing risk is focused on: valuation, market cycle and momentum. For example, looking at market liquidity, de Pourbaix saw some risks starting to emerge, like rising interest rates.
At Private Investment Consulting, Senior Investment Consultant, Con Mancuveni said that during times of market uncertainty, the manager favoured managing market risk by using active managers.
“When you’re late in the market cycle, we believe active managers tend to outperform,” Mancuveni said.
The IMAP Investment Forum is a community of interest for dealer group researchers, investment teams and independent researchers, where they can hear and learn from specialist portfolio managers and chief investment officers of advisory businesses. These experts and advisory professionals provide their insights on the practical issues involved in implementing managed accounts in an advice business.