As uncertainty roils global stock markets, investors need to make considered choices when investing and trading shares.
“Uncertainty is the order of the day in the US, and that is not what markets were expecting in January,” Bermuda-based Alec Cutler, portfolio manager at Orbis Investments, said at the end of March.
“Coming into the year, the US stock market traded at sky-high valuations, having notched two consecutive years of 20%-plus returns,” he said in a quarterly commentary.
“That made us cautious. When prices are high, expectations are high, and when expectations are high, so is risk. Fortunately, those high expectations were concentrated in the US, as markets elsewhere were roundly neglected.
“And with companies elsewhere broadly ignored, compelling stock-picking opportunities emerged all over the globe.”
Given the prevailing risks, Orbis continues to shift portfolios in a defensive direction. “Net of hedging, we have less exposure to stock market risk than the 60/40 index benchmark,” said Rob Perrone, investment counsellor at Orbis in London.
When prices are high, expectations are high, and when expectations are high, so is risk
— Alec Cutler
“In addition to valuations, we have concerns about the US cycle. Its economy is vulnerable to any weakness in the stock market, and neither the White House nor the Federal Reserve seem inclined to help.”
At most points over the past 15 years, this would look like a time to buy the market dip, because the government and central bank would pump money into the economy at the first sign of trouble, said Perrone. “However, this time that looks unlikely.”
Cutler noted that “nobody rings a bell when the market turns, and trying to time these moves in advance is a fool’s errand”.
“We would rather respond to prices. In the US, prices continue to embed high expectations — perhaps too high,” he said, adding that expectations may be starting to decline to more reasonable levels.
In addition, with equity valuations still reasonable outside the US at the end of March, Orbis was seeing plenty of other opportunities.
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