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ARTICLE 50: ONE MONTH ON & TOP TEN TIPS FOR BREXIT INVESTING

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ARTICLE 50: ONE MONTH ON & TOP TEN TIPS FOR BREXIT INVESTING

By Michelle McGrade, chief investment officer, TD Direct Investing

Given that it has been more than a month from the date Article 50 was triggered and the two front runners in the French presidential race are confirmed, just how well are UK markets doing and how are global ones faring in a time of such regular change?

Time for a bit of sense and sensibility

As we got closer to Article 50 being triggered, investors were becoming a little more confident about what Brexit could mean for their investments. Over a three-week period, concluding the same week Theresa May finally penned her letter to President Tusk, the number of our customers who didn’t know whether the decision would be positive for their investments dropped from 44% to 35%, suggesting that investors were initially a bit spooked by the uncertainty, but as things became clearer, their sentiment became more positive.

UK equity market valuations look attractive

That is if we look at price to earnings (P/E) ratio (this measures the market price of a company’s stock relative to its corporate earnings). The below chart represents equity market valuations of five geographical regions based on P/E ratios. We can see that the FTSE All-Share index is priced just above MSCI Asia and MSCI Emerging Markets, both of which are considered attractive right now.

Past performance is not a reliable indicator of future returns. Source: Bloomberg to 31 March 2017

Past performance is not a reliable indicator of future returns.
Source: Bloomberg to 31 March 2017

So did global markets reflect this positivity as well?

The US market looks a bit stretched

Using the same chart from above, it clearly shows that US equity market valuations are looking a little stretched. This trend is mirrored in the below chart looking at price-to-book (P/B) ratio (which measures a company’s market price in relation to its book value); again using the same five geographical regions.

Past performance is not a reliable indicator of future returns. Source: Bloomberg to 31 March 2017

Past performance is not a reliable indicator of future returns.
Source: Bloomberg to 31 March 2017

Does this mean that the US bull run is about to come to an end?

The equity bull market is entering its eighth year, and for US stocks this is the second longest bull market since WWII (the longest having been between 1987 and 2000).

The current bull market is different from the 1987-2000 period, in that interest rates have fallen throughout. Bond yields have also declined to historically low levels, as demonstrated in the next chart. The major concern this time is that the majority of recent equity returns have been driven by investors bidding up prices in a global hunt for yield while earnings have remained flat. This might also have something to do with the way investors react to volatility; different to how they have done so historically.

Past performance is not a reliable indicator of future returns. Source: Bloomberg to 31 March 2017

Past performance is not a reliable indicator of future returns.
Source: Bloomberg to 31 March 2017

What is the VIX telling us?

The Volatility Index (VIX) (market sentiment indicator) remains at depressed levels. The chart shows that the opposite trend between S&P 500 and VIX has reached an extreme level: 2364 vs 12.

Historically, spikes in the VIX coincide with sharp drops in the S&P 500 but as the chart demonstrates, huge spikes are a rarity in the last five or so years.

Past performance is not a reliable indicator of future returns. Source: Bloomberg to 31 March 2017

Past performance is not a reliable indicator of future returns.
Source: Bloomberg to 31 March 2017

What can we deduce from this?

The data shows market valuations are stretched in some geographical regions. This comes against a backdrop of the potential threat of rising interest rates and occasional volatility, triggered by events like Brexit.

Despite the fallout from Brexit and upcoming elections in France and Germany, the outlook for global equities over the medium term remains cautiously optimistic. With global economic indicators strengthening and earnings picking up, global equities could deliver modest returns but with higher volatility. Additionally, there is the prospect the new US administration will push through pro-growth policies that are likely to provide a substantial boost to corporate earnings, but these are yet to be confirmed.

Despite high valuations of US equities, they are still attractive to hold due to the high-quality nature of the US market. The longer-term outlook on emerging markets looks potentially positive as they are cheaper than developed markets.

 

So, what 10 things should investors do as Britain secures its long-term future?

  1. Have a clear investment strategy

Martin Cholwill, fund manager of the Royal London Equity Income, recommends that investors go for ‘dull and reliable’ instead of being dazzled by what seems ‘exciting’. Richard Buxton, fund manager of Old Mutual UK Alpha, agrees that having a clear investment strategy is important. He said: “The key to unlocking any investment reward is to have a high conviction approach and a fair bit of patience.”

  1. Invest for growth

If you’re investing for growth, it’s normally recommended that you think about a minimum time horizon of five years or more.

  1. Invest for income

If you’re looking for income, consider funds which invest in high-quality companies which are backed by cash flows, giving them the ability to pay dividends out of cash reserves.

  1. Stay calm & stay invested

Remember: it’s about time in the market, not timing it! Use regular investing to take the emotion out of investing and not over-commit. Should any opportunities arise, you’ll also be well-positioned to take advantage of them.

  1. Run your winners

It’s difficult to do, but the aim should be to buy at, or close to, the bottom and sell at the top. Run your winners. This basically means holding on to your investments that have done well, although it can be a good approach to take some profits – known as ‘top slicing’.

  1. Cut your losses

Don’t be afraid to cut your losses if an investment is clearly not going to gain in value. But remember, you only crystallise a loss if you sell, so if you think the value will rise again, hold your nerve and stay invested.

  1. Don’t get trigger-happy

The most skilled fund managers don’t expect instant success. When we asked our Best of British fund managers how long they typically held onto stocks for, the average period was three to five years. See what stocks the Best of British Fund Managers are holding most.

  1. Don’t believe the hype

Investors stand to benefit from not buying into the hype around particular shares or sectors, and to stick to their guns and invest regularly. Investors’ tendency to follow performance, which frequently sees them buy at the top of the market and sell at the bottom, can be painful and costly.

  1. Back the Best of British

You can’t ignore a solid track record. Our Best of British Fund Managers list contains some core fund managers who have been there and done it through market ups and downs, riding out difficult times to deliver long-term outperformance.

  1. Embrace opportunities

Take your time, think about your long-term investment goals, but embrace any opportunities that arise.

Investing

Northern Trust: Outsourcing Accelerates Through Pandemic as Investment Managers Seek to Improve Margins, Enhance Business Resilience, and Future-Proof Operations

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Northern Trust: Outsourcing Accelerates Through Pandemic as Investment Managers Seek to Improve Margins, Enhance Business Resilience, and Future-Proof Operations 1

White Paper Sees Increase in Managers Outsourcing Middle and Front Office Functions to Achieve Optimal Business Structures

According to a white paper published today by Northern Trust (Nasdaq: NTRS), investment managers of all sizes and strategies have been prompted to undertake a comprehensive review of their operating models as a result of the Covid-19 pandemic which has accelerated existing trends that are compounding cost pressures. This has led increasing numbers of managers to outsource in-house dealing and other functions, such as foreign exchange and transition management, hitherto seen as core.

While cost savings remain a core driver, and indeed are one outcome of outsourcing, costs are no longer the only focus. Far from being solely a defensive reaction to increased pressure on margins, the white paper (‘From Niche to Norm’) describes outsourcing as part of the target operating model, or moving toward the ‘Optimal State’ for many investment managers, and  explains how the focus “has expanded to the variety of other potential benefits offered – enhanced capabilities, improved governance and operational resilience.”

Gary Paulin, global head of Integrated Trading Solutions at Northern Trust Capital Markets said: “The pandemic has challenged a range of operational assumptions. Working from home has, for example, questioned the need for a portfolio manager to be in close proximity with the dealing desk. Previously considered essential, the pandemic has effectively forced firms to ‘outsource‘ their trading desks to remote working setups and the effectiveness of this process has disproved the requirement for proximity, in turn, easing the path to third-party outsourcing. Many investment managers are actively considering outsourcing to a hyper-scale, expert provider as a potential, cost efficient solution – one that maintains service quality and, hopefully, improves it whilst adding resiliency.”

Northern Trust’s white paper compares outsourced trading to software-as-a-service stating: “instead of carrying the cost and complexity of running an in-house solution, firms move to an outsourced one, free up capital to invest in strategic growth and move costs from a fixed to a variable basis in line with the direction of travel for revenues.” 

Guy Gibson, global head of Institutional Brokerage at Northern Trust Capital Markets said: “The opportunity to deploy capital to build new fund structures, develop new offerings, focus on distribution and enhance in-house research has been taken up by several of our clients to the benefit of their investment approach, and to the benefit of their investors.  Additionally, in the last two months alone, many firms have recognized that outsourcing to a well-capitalized, global platform has enabled them to take advantage of cost-contained growth opportunities in new markets.”

A further development, which has echoes of the journey the technology industry has already undertaken, is the move towards ‘whole office’ solutions, which represent the next potential wave in outsourcing.

According to Paulin; “recently we have observed a growing number of managers wanting to outsource to a single, hyper-scale professional service provider who can do everything, everywhere. This aligns with Northern Trust’s strategy to deliver platform solutions for the whole office, serving our clients’ needs across the entire investment lifecycle.”

The white paper can be downloaded here.

Integrated Trading Solutions is Northern Trust’s outsourced trading capability that combines worldwide locations and trading expertise in equities and fixed income and derivatives with access to global markets, high-quality liquidity and an integrated middle and back office service as well as other services, such as FX. It helps asset owners and asset managers to meaningfully lower costs, reduce risk, manage regulatory compliance and enhance transparency and operational efficiency.

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How are investors traversing the UK’s transition out of lockdown?

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How are investors traversing the UK’s transition out of lockdown? 2

By Giles Coghlan, Chief Currency Analyst, HYCM

Just when we thought we had overcome the initial health challenges posed by COVID-19, the UK Government has once again introduced lockdown measures in certain regions to curb a rise in new cases. This is happening at a time when the government is trying to bring about the country’s post-pandemic recovery and prevent a prolonged economic downturn.

This is the reality of the “new normal” – a constant battle to both contain the spread of the virus but also avoid extended economic stagnation.

Of course, no matter how many policies are introduced to spur on investment, traders and investors are likely to act with caution for the foreseeable future. There are simply too many unknowns to content with at the moment.

To try and measure investor sentiment towards different asset classes at present, HYCM recently commissioned research to uncover which assets investors are planning to invest in over the coming 12 months. After surveying over 900 UK-based investors, our figures show just how COVID-19 has affected different investor portfolios. I have analysed the key findings below.

Cash retreat

At present, it seems that by far the most common asset class for investors is cash savings, with 78% of investors identifying as having some form of savings in a bank account. Other popular assets were stocks and shares (48%) and property (38%). While not surprising, when viewed in the context of investor’s future plans for investment, it becomes evident that security, above all else, is what investors are currently seeking.

A third of those surveyed (32%) said that they intended to put more of their wealth into their savings account, the most common strategy by far among those surveyed. This was followed by stocks and shares (21%), property (17%), and fixed interest securities (17%).

When asked about what impact COVID-19 has had on their portfolios throughout 2020, 43% stated that their portfolio had decreased in value as a consequence of the pandemic. This has evidently had an effect on investors’ mindsets, with 73% stating that they were not planning on making any major investment decisions for the rest of the year.

Looking at the road ahead

So, it seems that many investors are adopting a wait-and-see approach; hoping that the promise of a V-shaped recovery comes to fruition. The issue, however, is that this exact type of hesitancy when it comes to investing may well slow the pace of economic recovery. Financial markets need stimulus in order to help facilitate a post-pandemic economic resurgence, but if said financial stimulation only arrives once the recovery has already begun, the economy risks extended stagnation.

It seems, then, that there are two possible set outcomes on the path ahead. The first is a steady decline in COVID-19 cases, then an economic downturn as the markets correct themselves, followed by a return to relative economic stability. The second potential outcome is a second spike of COVID-19 cases which incurs a second nationwide lockdown – delaying an economic revival for the foreseeable future. At present, the former of these two scenarios is seemingly playing out with economic growth and GDP steadily increasing; but recent COVID-19 case upticks show that it’s still too soon to be certain of either scenario.

A cautious approach, therefore, will evidently remain the most common investment strategy looking ahead. But investors must remember that, even in the most uncertain times, there are always opportunities for returns on investment. Merely transforming a varied portfolio into cash savings risks a long-term decline in value.

High Risk Investment Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. For more information please refer to HYCM’s Risk Disclosure.

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Hatton Gardens 5 top tips for investing in Diamonds

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Hatton Gardens 5 top tips for investing in Diamonds 3

By Ben Stinson, Head of eCommerce at Diamonds Factory

Investing in diamonds can be extremely rewarding, but only if you know what to look for. For investors who lack experience, finding your diamond in the rough can be quite daunting.

For even the most beginner of diamond investors, the essentials are fairly obvious. For instance, you need to ask yourself will the diamond hold its value over time? What’s the overall condition of the stone and the jewellery? Is there history behind the item in question?

Although common sense plays a big part in investing, people often need insider tips and tricks to go from beginner to expert. Tony French, the in-house Diamond Consultant, at Diamonds Factory shares his professional knowledge on the 5 most important things to look for when investing in diamonds.

1: Using cut, weight and colour to determine value

Firstly, consider the shape, colour, and weight of your diamond, as this can play a pivotal role in guaranteeing growth in the value of your item. Granted, investing trends change with time, but a round cut of your diamond will almost always be the most sought after. The cut of your diamond is incredibly important, as it can influence the sparkle and therefore, the overall value. It’s a similar story for the intensity of some colours, such as Pink, Red, Blue, Green etc. Concerning weight, the heavier (bigger) stones will generally increase in value by a bigger percentage. Collectively these factors also contribute to the supply and demand aspect, which will determine their high price, and will ensure your item is re-sellable.

2: Provenance

Looking for significant value? Well, aim to own jewellery or diamonds that come from an important public figure. If you’re lucky enough to own a piece that has significant history, or was owned by a celebrity or person of interest, it’s an absolute must to have concrete evidence of this. Immediately, this proof will increase an item’s overall value, and there’s a good chance the stardom of your item might drum up interest amongst diehard fans, increasing the value even further…

Equally, it’s possible to proactively bring provenance to unique diamonds of yours. For instance, you can offer to loan bespoke, or unusual pieces for film, theatre, or TV performances – then it can be advertised as worn by xyz.

3: Find the source

Ben Stinson

Ben Stinson

Establishing your diamond’s source is one of the most important things you can do when investing in diamonds. If you’re starting out, try to purchase diamonds that have NOT been owned by too many people, as the overall value of the diamond will reflect multiple ownership. Alternatively, I’d always recommend buying from suppliers like ourselves or other suppliers and retailers, who buy directly from the people who have had them certified.

Primarily, this will allow you to have a greater degree of transparency, which is crucial when buying such a valuable item. Next, you should immediately see an increase in value of your diamonds, as identifying a source will allow traceability and therefore, market context.

4: Certification

Linked closely with my previous point, is the requirement to ensure that your diamonds are certified by a credible lab, and you have the evidence to prove so (a written document with specific grading details about your diamonds) – this will remove any doubts of impropriety.

It’s essential to remember that not all labs are the same, and many labs are better than others. Both the AGS (American Gem Society) and GIA (Gemological Institute of America) have great reputations and are world renowned. I’d recommend doing your own research into the labs, and when you’ve found the pieces that you’d like to invest in, then make an informed decision based upon your findings. Ultimately, proving certification will make your stones easier to insure, and deep down, you can have peace of mind knowing you have got what you have paid for.

Don’t forget to keep this paperwork in a safe location as well – you’d be surprised how many people we’ve met who have lost, or forget where they’ve placed it.

5:  Patience is a virtue…

If the market is strong, it might be tempting to look for an immediate sale once you’ve purchased a high value item. However, I suggest holding onto your diamonds for some time before even thinking about selling. More often than not, an item is more likely to increase in value over a few years than a few days – try and wait a little longer!

Equally, I would encourage having your diamonds, or jewellery professionally valued regularly. If you don’t have the knowledge to make a rough judgement on how much your pieces are worth, a consultant or expert can provide both a valuation, and contextualise that amount in the wider market. From there, you should be empowered with the knowledge to decide whether to keep or sell.

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