1st March 2013
Harold Wilson, UK prime minister during the 1960s and 1970s, famously said “ a week is a long time in politics.” But in investments, a week is either an eternity or nothing at all writes financial journalist Tony Levene. It was just a few days ago when headlines of the “Italy descends into comic chaos” variety dominated the media. The Italian elections left no party with overall control with the balance effectively held by career comedian Beppe
Grillo and his “Cinque Strelle” (Five Star) party and accidental comedian Silvio Berlusconi.
Even though this result was largely foreseeable – Italians were not surprised – it was only on Tuesday morning that markets reacted to the numbers. Before most individual investors had even had their early morning cup of tea, equity markets across the world had crashed with the FTSE 100 index losing around 1.5 per cent in double quick time before recovering slightly on the day to end 1.39 per cent down.
European bourses fared even less well. Cue a queue of economists lining up on breakfast TV to tell us that this could mean the end of the world as we know it. And as with the Greek crisis last year, the more extreme the view, the higher the viewer figures. But by the end of the week, the UK equity market was roughly back to where it had been before anyone factored in Italian politics. Investors who took their lead from the noise over Italy and bailed out of equities have lost out. The good news, however, from advisers is that investors in both funds and individual equities are fast learning to ignore the short term – other than as a brief opportunity to pick up a few bargains. They say investments are in companies, not currencies, in profitability not polls.
And one little commented fact. As the doomsters predicted Italian meltdown, investment group Carmignac Gestion announced it was strengthening its team in Italy with new hirings whose “principal task will be to further develop relationships with financial institutions and intermediaries in Italy”.
So what happened in the markets? Bersani, the centre-left leader favoured by the markets, failed to garner enough votes. As Azad Zangana at Schroders puts it: “Centre-left coalition leader, Pier Luigi Bersani won the race for the lower house by a wafer-thin majority, but failed to win enough votes to take the equally important upper house (senate). Bersani’s polling was not strong enough to suggest that he would be able to take the senate, but he was expected to join forces with the previous technocratic leader Mario Monti in order to secure enough votes. Unfortunately, both Bersani and Monti received too few votes.” This led to “uncertainty” which, everyone agrees, the market abhors.
However, markets are always riddled with uncertainty – otherwise there would only be one view. And while the initial sharp early morning reaction to the hoped-for Bersani/Monti grouping to gain enough seats showed how some market participants thought, the vast majority of investors did nothing. It only takes a few sellers to send the market tumbling – falls are almost always sharper and more media-worthy than rises – especially as there were no immediate buyers. They were waiting to see what would happen.
Advisers see the down-swing as a “speed-bump on the road” or a “storm in a teacup”. Darius McDermott at Chelsea Financial goes for the former metaphor. “The bump has slowed the traffic a bit but vehicles are still moving forward. It has reminded us about volatility and how falls are bound to come after equity markets rose around 10 per cent since the end of November but my clients are not playing the VIX volatility index or spread-betting. They are not selling European or UK fund because of a political deadlock in a country with a history of political deadlocks. It has been clear since last May that politicians will not let the Euro go and Europe may now be one of the better value markets around. Investment in funds is about the choice fund managers make of companies. At the moment, I place Black Rock Continental Europe and Jupiter European on my list of preferred funds.”
At The Share Centre, whose customer base has a mix of funds and individual stocks, head of investment research Andy Parsons, compares the reaction to the UK credit rating downgrade and that towards the Italian elections. “Both have been talked about for some time. And while the initial reaction to the Italian poll was severe for a few hours, the UK downgrade barely registered on markets. Investors have had a lot to consider over the past few years and they do not get spooked by these scenarios in the way they might have once done. Most do nothing, some see it as a buying opportunity. Every big announcement has obviously been greeted with uncertainty but what we saw after Italy was possibly no more than an excuse for some investors to take profits after a steep rise. The market has recovered and, while no one knows what is around the next corner, the January euphoria seems to be longer lasting than expected. But markets are looking far ahead – they are good at that – rather than reacting to every piece of uncertainty.”
He warns against following “the needs of the media for a headline”. His favourite European funds are Standard Life European Equity Income, Jupiter European and Black Rock European Dynamic. “Despite the negative headlines, there are some great companies in Spain and Italy.
If you buy an actively managed fund, you have to trust it is aware of macro economics but more importantly of individual companies because that is what a fund is constructed from.”
The “companies not economies” line is also important for adviser Ben Yearsley at stockbrokers and fund group Charles Stanley. “I treated the Italian election results as a storm in a teacup and so did our client base. Italy has had governmental instability before while Belgium went over a year without a government. Life goes on and storms blow out. It may be messy but a panic often leads to a buying
opportunity. You are investing in companies, not governments. In any case, some European funds have little or no exposure to Italy or Greece or Spain. The key thing is choosing equities with a future. I like Henderson European Special Situations – it currently has no Italian companies – and Jupiter European.”
For investors who want to ignore the Italian noise and look for something longer term in Europe, then the words of Tim Stevenson at fund managers Henderson could be worthwhile. Writing five weeks ago – well before the Italian elections – he said: “There is clear evidence that European economies have at least stopped getting worse, and may perhaps begin to look a little better later in 2013.
More likely is that we will see a switch from bonds – where the large flow of money in recent years has resulted in a number of ‘bubble’ characteristics. And if that is the case, the flow back towards equities could be large and last some time. This reinforces our view that European equities look attractive still at current levels, and since a consolidation is entirely likely after such a rapid rise, any weakness is likely to be met by renewed buying interest.”