Auckland-based investment consultant, Jonathan Eriksen, has been bearish for some time.
And this year markets have finally matched his sentiment with several bouts of volatility spoiling the just-right Goldilocks good times investors had become accustomed to.
Despite the mood-altering market moves, though, Eriksen does not expect a full-blown crash any time soon.
“I don’t think market falls will be extreme unless geopolitical events turn particularly nasty,” he said.
While there were plenty of geopolitical events to worry about – trade wars, Brexit, Chinese and Russian global power plays and Brexit to name a few – Eriksen said markets would be dominated by normalising US interest rates and corporate earnings trends.
He said algorithmically-managed passive investment funds would exacerbate market volatility as they react automatically to earnings results.
“If earnings go down then fair market value goes down,” Eriksen said, with rules-based funds forced to sell as per the algorithm
He said algorithmic passive funds probably represented about half of the trading in global equities.
“But at this stage of the market it’s disgraceful putting people into passive strategies,” Eriksen said.
Overall, he favoured actively-managed Australasian assets – both listed and private equity – with a bias to “low-risk multi-asset funds”.
Australian and NZ stock markets would be supported by flows from superannuation and KiwiSaver, respectively, Eriksen said and economies that were in OK shape.
“Australia and NZ have independent central banks and while their economies are not doing brilliantly, they’re growing,” he said.
Currently, Eriksen has local boutiques Mint Asset Management and Castle Point Funds Management in the frame along with a bevy of NZ private equity firms.
He also uses the Canberra-based Continuity Capital private equity multi-manager in portfolios.
Continuity, chaired by well-known Australian private equity investor, Les Fallick, accesses the asset class mainly via third-party managers.
“We also, very selectively, invest directly in private companies along-side a managed fund (a co-investment),” Continuity says. “We research investment opportunities in all geographies, but have a particular focus on Asia (including Australia and New Zealand).”
Eriksen said as expected asset returns fall investors would have to be more selective on where and how they allocate money.
Both bonds and equities would probably experience “lower-for-longer” returns as the 2008 crisis-fighting monetary measures slowly unwind, he said.
“I would say we’re now more than half-way through the GFC,” Eriksen said, optimistically.