Why chasing returns is dangerous

2017 has been interesting for a whole host of reasons. Not only have we seen the global economy deliver a sustained expansion but central banks have also started to gradually withdraw the extraordinary monetary policy that has helped to support asset prices over the past decade. However, over recent months we have begun to see equity markets run out of steam, with some indices now largely tracking sideways.

Momentum-driven markets

We recently highlighted that a number of large US technology stocks were responsible for more than one third of the S&P 500’s total return year-to-date as investors have piled in to exciting, ‘high growth’ stories. Indeed, the valuations of such stocks are pricing in considerable future growth. The graph below shows the collective market-cap of Facebook, Amazon, Apple, Netflix and Google, the so-called ‘FAANG’ stocks, is nearly three times that of the entire German stockmarket.

Market-cap ($trillion) 

Source: Morningstar Direct & Canada Life Investments research, as at 05/12/17.

We believe this highlights that beneath the relative calm of the broader market, investors are allocating to very specific areas, with much of the rest enjoying significantly less support. This momentum-driven attitude can also be seen across more unorthodox asset classes, Bitcoin being the prime example. The main cryptocurrency has risen from $952 to more than $17,000 this year whilst also being incredibly volatile. To put this into context, the annualised volatility of a high risk equity market would generally be considered to range between 20-30%. In 2017, the volatility of Bitcoin has been more than 140%.

The hunt for yield

Fixed income investors have enjoyed a more than 30-year bull market as yields have consistently fallen and remain at near historic lows. This has pushed investors into more risky assets in the hunt for yield, with corporate bonds dominating their government counterparts in recent times. This trend has accelerated in 2017, with the yield on European high yield securities now less than that of 10-year US treasuries. We have also seen Argentina able to issue a 100-year bond, with an effective yield of 8%, despite their history of defaulting on debt repayments.

Maintaining diversification

We believe these kinds of actions are amber warning lights for markets and asset prices in general, especially considering that monetary tightening is likely to increase in 2018. At Canada Life Investments, given this likelihood, our fixed income exposure is currently positioned short of the benchmark, whilst we are also positioned relatively defensively across our equity allocation as we believe a correction is becoming a greater risk.

Our multi-asset funds are managed to a rigid asset allocation framework, to ensure that our investors are able to maintain a diversified exposure to fixed income, equities and property across the market cycle. For example, our UK commercial property holdings have provided stability to the funds in recent years and continue to provide an attractive yield through a diversified portfolio of assets.

Important Information

Past performance is not a guide to future performance. The value of investments may fall as well as rise and investors may not get back the amount invested. Income from investments may fluctuate. Currency fluctuations can also affect performance.

The information contained in this document is provided for use by investment professionals and is not for onward distribution to, or to be relied upon by, retail investors. No guarantee, warranty or representation (express or implied) is given as to the document’s accuracy or completeness. The views expressed in this document are those of the fund manager at the time of publication and should not be taken as advice, a forecast or a recommendation to buy or sell securities. These views are subject to change at any time without notice. This document is issued for information only by Canada Life Investments. This document does not constitute a direct offer to anyone, or a solicitation by anyone, to subscribe for shares or buy units in fund(s). Subscription for shares and buying units in the fund(s) must only be made on the basis of the latest Prospectus and the Key Investor Information Document (KIID) available at www.canadalifeinvestments.com. Some Canada Life Investments funds may invest in property funds that may be illiquid and subject to wide price spreads, both of which can impact the value of the fund. The value of the property is based on the opinion of a valuer and is therefore subjective.

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CLI01046 Expiry 15 December 2018

David Marchant

David Marchant

Chief Investment Officer, Canada Life Limited & Managing Director, Canada Life Asset Management Limited.

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