Equities – Feature
EQUITIES: DON’T PANIC!
Last year was tough for equities. The bad news is that, despite a strong start to the year by the major indices, the outlook for 2023 looks equally bleak. This puts investors in rare territory as records show that two consecutive negative years for equities have only happened four times in the past 100 years. There are similarities to historical equity downturns. In 1974, the market was stifled by an overbearing inflationary picture. Then in the early 2000s, there was a tech boom and bust: a sit- uation now playing out in slow motion in that it is taking place over a longer period.
An indication of the fall of tech is the demise of the once-fa- voured investor trend of the FAANG [Facebook, Apple, Ama- zon, Netflix and Google] giants. Beyond the historical comparisons, there are other reasons – to misquote singer Ian Dury – not to be cheerful. The most fun- damental is that relative to their underlying earnings, shares remain expensive on a historical basis. Even the biggest block- head could work out that this is far from ideal. Putting the picture into perspective, Carrie King, global deputy chief investment officer at Blackrock’s fundamental equities division, says: “In equities, we believe recession isn’t fully reflected in corporate earnings expectations or valuations.” Here the investment environment is reaping what the wider financial world sowed. That is to say, today’s valuations are a result of central banks in the US and Europe injecting an abun- dance of liquidity into the market through quantitative easing. But now these programmes are being reversed, the repercus- sions are feeding, albeit slowly, through the financial system. One of the ways this has become evident for investors is the failure of the 60/40 portfolio, which plunged 17% last year. This poses the simple question: why go for equities when you are going to get hammered?
We shall not be moved Such a picture does not augur well for institutional investors. How then should pension schemes, insurers and charities address this precarious situation?
While corporate defined benefit (DB) schemes have reduced their equity exposure, stocks continue to be a cornerstone of open DB schemes and defined contribution portfolios. Inves- tors who still require income, open DB schemes and DC among others, have taken different positions in response to the equity malaise. The first is to stick it out. This is the position taken by George Graham, fund director at the South Yorkshire Pensions Authority. “We have a long-term investment horizon, so ‘sticking it out’ is part of the approach. Although that doesn’t mean we ignore underperformance by fund managers or significant secular trends, which might cause us to rebalance between or out of markets,” he says. Nevertheless, there also exists a degree of investment pragma- tism in South Yorkshire’s approach, which involves shifting to other asset classes. But for Graham it is important for his fund to hold assets that have capital and dividend growth. “We need to maintain exposure to growth assets, and listed equities are a key part of this,” he says. The ‘stick it out’ approach is also shared by Richard Tomlinson, chief investment officer at Local Pensions Partnership Invest- ments. “It will definitely be a keep calm and carry on approach for us,” he says. “We will not be dumping equities. We look at the long-term horizon. “Within equities,” Tomlinson adds, “we have a more effective, quality-type of approach, which means we tend to invest in stuff with a long-horizon, a Buffett-style portfolio: earnings effectively for the long run. We don’t try and make regular calls on equities.”
Issue 121| March 2023 | portfolio institutional | 43
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