Yesterday’s data from the Investment Management Association* has revealed that retail investors piled into equity funds in 2013 with net retail sales of £11.4bn, the highest level since 2000. Unsurprisingly soaring developed world equity markets, supercharged by the tailwinds from massive central bank stimulus programmes, whetted the appetite of retail investors.
After the incredible gains on major indices last year we think it makes sense for investors to exercise some caution. The environment for 2014 is altogether different as the US Federal Reserve has begun winding down QE and market expectations have begun to dwell on eventual interest rate hikes in the US and UK.
Following years of ultra-cheap money, markets are now on the path to ‘normalisation’. But that journey could be a rugged one with consequences across global asset classes and markets. “QE” has been akin to a course of powerful drugs which have been administered to sustain a patient (the US economy), but now the patient is recovering they need to be carefully weaned off the drugs to which they have become addicted.
Worse still, the patient’s relatives - who were never the intended recipients of QE – have also been quietly enjoying some of this mind-blowing medication on the side, squandering the opportunity for structural reform. The emerging markets now face the prospect of going into “Cold Turkey” as the supply of medication is turned off. The cost of capital is escalating aggressively for the emerging world, as evidenced by an almost doubling of interest rates yesterday in Turkey as it battles to defend its currency.
While the recent rout in emerging markets may present a value opportunity for truly long-term investors, they also are a potential value trap as they feel the impact of tightening. These markets could well experience further volatility as the Fed’s decision making plays out, so there is no certainty that the shake-out is over.
We therefore feel the better near term opportunities may be closer to home, in UK and European equities. We also think that given the post-QE adjustment process, investors might consider phasing their ISA and pension investments into the markets, to help smooth out potential ups and downs.
* IMA Statistics 29 January 2014 http://www.theinvestmentassociation.org/media-centre/press-releases/2014/press-release-statistics1213/