Buy Assets that Failed in 2015, says Psgima

Mining stocks, banks, emerging markets and high yield credit all fared poorly last year - which is why you should consider them for your 2016 portfolio says Psigma's Tom Becket

Emma Wall 5 January, 2016 | 4:09PM
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Emma Wall: Hello and welcome to the Morningstar series, "Ask the Expert." I'm Emma Wall and I'm joined today by Tom Becket, Chief Investment Officer of Psigma.

Hi, Tom.

Tom Becket: Hi, Emma.

Wall: So, we're here today to give your predictions, if you will, for 2016. But before we jump into the New Year, perhaps we could have a look at last year. Last year everybody said that the U.S. was not going to do so well, but actually seemingly it was not that bad.

Becket: I mean, I suppose the U.S. was actually a pretty good indicator for the rest of the world; bumpy, volatile and ultimately not much reward and return achieved. So, if you look at the U.S. market, the S&P in capital returns terms was effectively flat, add in dividends it’s up a couple of per cent. For U.K. investors it was slightly better because the pound weakened against the dollar towards the end of the year. But ultimately, the market was driven by a very small number of very high-growth stocks. It is a very narrow market.

Making money in the U.S. last year was difficult and actually really making money across the world was pretty difficult last year. Unless you were actively invested in places like Europe and Japan, which at the start of the year were quite contrarian, by the end of the year were quite consensual, it was difficult to make money and that's not just in equities.

Most asset classes were pretty lackluster last year. It wasn't a great year to be an asset allocator. Let's hope this one is going to be better.

Wall: Perhaps that's the point then. You said all the reasons why the U.S. did perhaps work, but actually, of a very bad bunch a positive return was not bad. Because of course in the U.K. you got less than that. You got negative returns in the FTSE 100 at least.

Becket: I think that's right. I think perhaps focusing on the FTSE 100 just on the capital return basis is probably the wrong thing for investors to do, all that's the obsession.

There were – there was money we made last year in U.K. equities and actually active funds had a very good year last year mostly because a lot of the damage done to the FTSE 100 rather than FTSE All-Share was in the energy and material space where people were very unwilling to take a positive view.

So, active money made quite good money in the U.K. last year but still it's not great returns to write home about, in most active funds probably up about 2% or 3%, better than some places, but ultimately a lot less good than people's expectations.

Wall: Well, with all that cheery news, should we perhaps go to forward looking? Let's start with domestic market. As you say, FTSE 100 was down but active managers were a couple of percent up. What are we looking for, for the domestic market in 2016?

Becket: Well, hopefully, better in the first half of the year but that's not going to be too higher bar to clear to be in all honesty. I think ultimately the U.K. will be reflective of what happens in the global economy. That's really what the U.K. market does. It's quite a good barometer for global activity and we think probably solid but unspectacular.

So, I think returns in the U.K. market itself will be solid but unspectacular. I'm asked by lots of people like yourself for yearend FTSE 100 prediction. It is nearly always wrong, I hasten to add, but I think ultimately we could see sort of 6% capital return. Adding dividends, I think a 10% return from FTSE All-Share this year is probably about right.

I think rather than the return obsession, perhaps focusing on what might drive that, I think the U.K. market could be quite an interesting battleground this year between that stuff that everyone loves on the one hand, U.K. consumer-focusing businesses, things like housebuilders, all those things which have done well because the U.K. economy has been okay, and interest rates have been low.

And actually focusing on those things now that everyone hates, things like energy, materials, banks, those have actually suppressed market returns in the last few years. I think actually this year there could be quite big inflection point and actually in our portfolio we are taking a much more passive focus at this point in time than an active focus.

Wall: Because it's brave bet to make – to look at those things that have lost, I mean, there have been some mining stocks out there that have lost 70% in 2015, and then to turnaround and think, “you know what, I'll put my cash in there” is it difficult contrarian thing to do.

Becket: Yeah, but I didn't get into the industry, all though that seemed much easier a decade ago, to buy things that everyone felt was safe and secure and comfortable.

Ultimately, history has taught us that those sorts of trades actually don't make you much money, although you can perhaps sleep well at night looking on a backward looking basis. I think 2016 could well be a year when you see major inflection points in the performance of certain different asset markets.

Let’s look at the things that did badly last year. U.S. high yield credit did very, very badly, this year it looks quite attractive I would say. Things like the energy sector, yes, I haven't got a clue on what's going to happen in six-month view, but on a six-year, I think you can probably double your returns in the energy sector as an example.

Wall: Emerging markets?

Becket: Well, I think that's actually another classic case in point. The emerging markets have performed poorly for the last few years. But if you divide up emerging markets now against developed markets, emerging markets everyone hates them, everyone is quite comfortable with developed markets.

Emerging market equity is cheap; developed market equity is arguably quite expensive. Sentiment towards emerging markets, dreadful; sentiments toward developed markets, pretty safe and secure. So, on a five-year view ultimately: go and buy some emerging markets.

It seems wrong at this point to have a zero weighting in the asset class. I think anything other than neutral now probably leads to uncomfortable times when those markets start to recover.

So that could well be a classic example of those things from 2015 they did badly doing well in 2016 and that is my view.

Wall: Tom, thank you very much.

Becket: My pleasure.

Wall: This is Emma Wall from Morningstar. Thank you for watching.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Emma Wall  is former Senior International Editor for Morningstar