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Turning up the volume

In the words of Warren Buffett, it is often advantageous to ‘be fearful when others are greedy and greedy when others are fearful’. The last few months have been volatile for global equity markets and we have tried to play that to our advantage.

We said at the start of the year that equities would do well, although temporary setbacks were to be expected. Markets started strongly and while there was a correction in March, the fallout was short-lived. We expected another fall in the third quarter and our fears grew as equity markets stormed ahead in early summer. We added portfolio protection within the New Star fund of funds, which helped mitigate losses.

We pursued long-term secular themes such as emerging markets and the competing need for resources. We extended the range of investments to include exchange traded funds which allow investors to participate in positive trends in areas such as soft commodities. Oil has reached new highs, under-lining our view that commodity demand is not dissipating. The case for commodities is made more powerful given the US Federal Reserve’s decision to lower interest rates. The global economy may slow a little but the longer-term outlook remains robust.

Markets have historically been expected to catch a cold when the US sneezes and higherbeta markets such as emerging markets especially so, yet they have proved resilient. In part, this is because turbulence has centred on weaknesses in the US economy, particularly the over-leveraged consumer. In contrast, countries in places such as the Far East have low borrowings or are fundamental in supplying resources that the world needs.

Technical readings make us optimistic about equity prospects in the medium term. Trade volume can be a good indicator of share price movements. Days on which the amount of volume traded in advancing stocks exceeds the amount of volume traded in declining stocks by a ratio of nine to one or greater tend to be followed by stronger than average market returns for up to six months after. There has recently been a cluster of 9-1 up days – a sign that we could be entering a period of rising markets.

The final and most simplistic of technical trends is the traditional seasonal rally in the fourth quarter. A further deepening of the malaise in the US could have ramifications for all markets, company profits are robust and secular stories remain intact.

We continue to favour equity funds over other asset classes in the near term.

Mark Harris is head of New Star’s fund of funds team

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