Short-term opportunistic investors were driving much of the current market volatility, according to Keith Poore, AMP Capital NZ head of investment strategy.
Poore said short-term investors were exploiting a “moving cross-hair” of global woes to leverage positions.
“When there’s bad news, there’s always people looking to push the angles to make money out of it,” he said. “Last month it was China, now it’s the European financial sector… it’s like cross-hairs are moving around looking for worries to target.”
Poore said while there were “plenty of things to worry about”, talk of a looming global banking crisis sparked by media rumours about German giant Deutsche Bank last week seems over-cooked.
“Deutsche doesn’t look like a ‘Lehmans moment’ to me,” he said. “It’s reported a loss, and started a restructure, which involves short-term losses for long-term gains.”
At the same time, he said the European banking sector reported positive lending and earnings growth for the “first time in years”.
“The market often shoots first and asks questions later,” Poore said.
But equity market volatility – that saw, for example, US stocks fall about 1.6 per cent last Thursday before rebounding 2 per cent the next day – has put investors on edge.
“History tells us not to panic at times like these,” Poore said.
He said the worst thing investors can do “when everything feels bad” is to sell down all their equities and risk crystalising losses.
At the same time, he said bonds continued to offer diversification benefits for investors, cushioning losses on equities.
“Bonds are still doing their job in portfolios,” Poore said.
However, he said with bond yields heading down fixed income investors may be looking at a number of different strategies.
“If you were a pure bond investor, you’ve just had a windfall gain and there may be opportunities to cash out and return when risk aversion has eased,” Poore said. “Most bond investors have a laddered portfolio, so as short-term investments roll off they might hold off reinvesting.”
He said widening credit spreads were also starting to look attractive.
Alister van der Maas, head of Russell Investments NZ, said market volatility creates buying opportunities in many areas.
“In 2008 bonds, along with most assets, were badly hit,” van der Maas said. “But there were also some amazing buying opportunities than some investors – including us – took advantage of.”
However, he cautioned investors about making rash moves in light of the current volatility.
“When investors want to make a tactical decision to divest they need to work out where to put the money,” van der Maas said. “If you want to switch out of bonds, for example, where would you go? Cash is really just a short-term bond.”
He said without a full understanding of the risks, investors should stick within their strategic asset allocation (SAA) parameters rather than taking tactical punts.
Van der Maas said a well-designed, and regularly-reviewed, SAA should include a thorough analysis of downside risk, giving investors a clear idea of the likelihood, and potential quantum, of a loss in any given year.
“And those investors that want to make tactical bets need to set out the parameters and work out in advance what they would do if it all goes wrong,” he said.