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THE INVESTOR
THE INVESTOR CENTRE
W
ith theVIX (the proxy for market
volatility) hitting a seven-year
low back in June, it is not surprising that
investors’ tolerance for risk appears to be
growing, as evidenced by the continued
strength in global equities and most other
nancial instruments. In a fascinating study
conducted by John Coates, a research fellow
at Cambridge, linking risk-taking to physical
responses to stress, it was shown that when
market volatility is high, cortisol (the‘stress
hormone’) levels increase, causing investor
appetite for risk to decline. Conversely,
when levels of market volatility are low,
cortisol levels remain largely una ected,
resulting in a greater willingness on the
part of investors to take on risk. In a recent
article in the
NewYorkTimes
called‘The
Biology of Risk’(7 June 2014), Coates
argued that transparency of monetary policy
and the resultant reduction of uncertainty
around the Federal Funds Rate has perhaps
caused the release of ‘one of the most
powerful potential brakes on excessive
risk-taking in stocks’. Because investors
know what’s coming, they take more risk.
Volatility may be low but stocks prices
are high: whether or not we have reached
bubble territory is subject to debate,
but investors should be cognizant that,
if risk is indeed largely predicated on the
price one pays for a security, it is no time
for complacency.
TWEEDY, BROWNE
Satellite manager: Global Equity
No time to be complacent as volatility
hits a seven-year low
Investors’ tolerance
for risk appears to
be growing
William Browne, Tom Shrager,
John Spears, Robert Wyckoff
All information correct as at 30 September 2014
G
lobal equities performed strongly in
August, aided by the S&P 500 Index
which passed the 2,000 mark for the rst
time. In the US, sentiment was boosted
by upwardly revised GDP data, with the
economy growing at an annualised rate
of 4.2% in the second quarter of 2014.
However, government bonds also performed
robustly as speculation grew that weaker
economic data could encourage the
European Central Bank to launch its own
bond-buying programme. In the global
equity income strategy, regional positioning
detracted, largely due to its bias against the
US, which outperformed. Sector positioning
was marginally negative, primarily due
to an overweight position in telecoms,
which underperformed. Stock selection
decisions in consumer discretionary were
unfavourable. In the UK growth & income
component of the portfolio, performance
bene ted from favourable sector positioning
and positive stock selection. Stock-level
highlights included mid-cap holdings such
as Booker, as the Mid 250 outperformed the
FTSE 100. Not holding banks also added
value.The strength in the gilt market was
driven by de ationary concerns in Europe
but also by expectations of lower terminal
interest rates, i.e. the global economic
upswing will be so shallow that central banks
will only have to move short interest rates up
by a small amount, which is good for gilts.
D
espite recent weakness in markets, we
remain optimistic on the outlook for
European equities.A number of investors
have become anxious that the European
economy may recover more slowly than
expected, prompting some pro t-taking in
the hitherto strongly performing cyclical
areas of the market.While a number of
macroeconomic data points, such as Italian
second-quarter GDP, have been somewhat
disappointing, credit conditions appear to
be improving. Both credit availability and
demand have, in fact, begun to recover and
theTLTRO should further boost lending.
The view from an investor who travels
extensively across the region, visiting
companies from many di erent industrial
sectors, is more positive. In fact, recent
quarterly earnings have generally surprised
on the upside. Curiously, some of the
best results have come from the banking
sector. Companies have, furthermore,
generally remained committed to longer-
term earnings guidance.We see recovery
gradually taking root across the region,
most notably in Spain and in a number of
the other economies that have embraced
austerity.A mixture of recovering revenues
coupled with stringent cost control and
strict capital discipline should generate
surprisingly strong earnings growth.This is
at a time when expectations are still framed
by the‘euro crisis’ and where valuations are
at historically compelling levels.
THREADNEEDLE
Strategic Managed
Speculation grows that ECB could
launch own bond-buying programme
S. W. MITCHELL CAPITAL
Continental European
Joint manager: Greater European
and Greater European Progressive
Recovery taking root in those
countries that embraced austerity
Government bonds
alsoperformed
robustly
Some of the best
results have come
frombanking
Richard Colwell, Stephen Thornber
and Jim Cielinksi
Stuart Mitchell
