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Hargreaves research head bullish in face of volatile 2017


Column inches are filled at this time of year with commentators’ predictions for the coming 12 months. It is a practice I have never quite understood. Nothing in financial markets will change simply because we have entered a new year. While it makes for interesting reading, the reality is markets cannot be segmented into predictable one-year chunks.

Take 2016. What an extraordinary year. It began when Leicester City won the Premier League in May. This remarkable feat quite rightly dominated headlines but it was overshadowed a few weeks later by the UK’s vote to leave the European Union. Trump’s victory in the US elections last month rounded off a year of the unexpected; one nobody predicted. I am told a £1 accumulator bet on all three of these events occurring would have netted a tidy £4.5m.

An investor in early 2016 who anticipated both Brexit and a Trump presidency might, understandably, have felt the need to cash in any investments and watch from the side-lines. Indeed, it seems many did just that: this year has been one of the most bearish environments I can remember. Yet share prices have continued to climb the perennial wall of worry and those who sat on cash have missed out.

This illustrates the risk of positioning a portfolio around macro views. Figures published by the Investment Association show investors dumped their UK equities in the months surrounding the EU referendum. However, while it has not been a smooth ride, those who held their nerve can now boast double digit returns.

Since the financial crisis of 2008, investors have spent far too much time and effort attempting to foretell future events. But while many will rush to change a portfolio ahead of a big event, the sensible take a step back and consider this: to make a positive contribution to the value of your portfolio you need to first correctly predict the event’s outcome. If you pass this first hurdle, you then need to anticipate what consequences this outcome will have on markets. Finally, if you have taken the decision to hold cash, you need to decide at which point to jump back in.

There might be a 50/50 chance you will pass the first step but there are infinite possibilities for how markets will react and the majority of investors fail to recognise when they should reinvest any cash. Most investors failed at the first hurdle this year, and even those who passed the first step have generally lost money by getting the subsequent choices wrong. The stock market does not hesitate to make fools of even the greatest minds.

At the risk of straying into the realm of making predictions, it strikes me there is sufficient bearishness and adequate cash around to support any stockmarket correction. Brexit was a prime example. The initial shock saw stockmarkets fall for two days. However, these falls were quickly grasped by those on the side-lines as an opportunity to re-enter at a discount and share prices quickly recovered.

Contrast this with the summer of 1987. Investors could see nothing but blue sky and had all the money they could spare in the market. Prices were only going one way: up. Until 19 October, when markets hit an air pocket and, with no buyers left on the side-lines for support, prices fell dramatically.

So while the rest of the country is bearish, I feel confidently bullish. There will be volatile times ahead, as there will always be something just around the corner to send markets into a spin. However, with so many investors in cash, I believe these periods will be short lived. The best course of action is to take no action. A sensibly diversified portfolio should need little tinkering and is often best left to its own devices.

Mark Dampier is head of research at Hargreaves Lansdown



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