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Get into equities despite sell-off, says Standard Chartered

By Alexandra Newlove

Despite a tumultuous fortnight in the stock market, family offices are being encouraged to look at whether they have enough global equity exposure, with the second-longest bull market in history predicted to keep lumbering through 2018.

Steve Brice, chief investment strategist at Standard Chartered Bank, said the majority of his family office clients were under-exposed to equities, and though the past week had seen trillions wiped off stock market values, this provided opportunity for investors to buy into.

“We do not believe that the recent sell-off is anything to be excessively concerned [about],” Brice, pictured, said.

“Although, it should remind investors that there is no such thing as a free lunch and the strong equity market returns are likely to come with significant volatility, especially as we get later in the cycle.”

According to Campden Research’s Global Family Office Report 2017 (GFOR) which surveyed 262 family offices with an average $921 million assets under management, the average portfolio comprised 27% global equities at the start of 2017.

A total of 44% of respondents said they planned to buy more developing market equities during the year, and 21% said they would allocate more to developed market equities.

Brice said investors who were under-exposed to equities should look at what they believe their allocation should be in three years, and make a plan of how to get there.

“This would probably be a slow drip-feed into markets, but then accelerating purchases on any significant weakness. We believe the past couple of weeks gives an opportunity to accelerate purchases.”

Standard Chartered had done analysis looking at historic 12-month equity returns based on forward price to earnings ratios.

“What you see is that 68% of the time, with valuations in the current band (16.9 to 18.5), we see positive returns from equities,” Brice said.

“Talking to clients over the last several years, we ask them which asset class they think will outperform and they say ‘equities’. Then they go and buy bonds,” he said.

The GFOR showed average bond exposure was 15%, with just 10% saying they planned to buy more developed-market bonds during 2017.

However fixed-income could become problematic this year as reserve banks hiked interest rates, reducing existing bond values.

“Sometimes, people need to lose a bit of money just to knock them out of their comfort zones. At some point, we are going to see that in the bond market, whether we see that this year or the following year, I don’t know,” Brice said.

Brice did not predict a recession until “the second half of 2019—if you twisted my arm”.

“We attach a 20 to 25% probability of [recession] in the next 12 months and therefore it cannot be ignored, but most of the data is pointing in the opposite direction,” Brice said.

Paul Donovan, global chief economist for UBS Wealth Management, said he was “almost prepared to guarantee no recession in 2018”, and that underlying economic data remained strong.

This was despite investor nervousness as the second-longest bull market in history continued to grind higher. The current volatility felt particularly uncomfortable, given the market’s unusually smooth and steady rise during 2017.

“What is particularly important about 2017 is the breadth, every major economy was growing. That is not a very common occurrence,” Donovan said.

He said risks for the upcoming year included policy error—central banks tightening too early or too aggressively—but that the answer to the question “when is the next recession?” is “not yet”.

He encouraged investors not to obsess about the details of growth.

“Economists include decimal points in their forecasts, purely to prove the profession has a sense of humour,” Donovan said.

“It is undoubtedly the case that economic data has become progressively less reliable in recent years. The revisions are larger, and more frequent than in the past. As a result, I think investors should focus on broad trends, and not worry about specific data points.”