Adrian Lowcock, Hargreaves Lansdown

Federal Reserve back-tracks on tapering, investors need to ignore the noise

Following the comments from Ben Bernanke in May, investors have clearly priced in some form of tapering with government bond yields having risen and prices having fallen. The decision by the Fed not to reduce the amount of QE each month therefore came as a big surprise, says Adrian Lowcock, Hargreaves Lansdown…

It appears the Fed were concerned by recent fiscal tightening, i.e. bond yields rising, which were largely caused by the Feds comments in May that they were going to implement tapering, So talk of tapering seems to have delayed the real thing.
 
Stock Markets in the US initially reacted positively to the announcement. The Fed has downgraded US growth expectations and holding off on Tapering QE means the Fed has less confidence in the strength of the US recovery. Yet US Markets rise. This is a clear example of how bad news is being treated as good.
 
The intervention of policy makers and politicians on stock markets continues making it very difficult for all investors to act. This announcement goes to show it is difficult to predict short term movements of markets or to speculate on policy announcements. Rather, investors should focus on their long term investment objectives, ensure they have a balanced and well diversified portfolio and when deciding where to invest, look for areas which are cheaper and offer some value over the medium and longer term.
 
For example, Continental Europe and Japan remain cheap and both still currently boast positive momentum. We maintain a positive stance on these markets. Several areas of the emerging markets are becoming increasingly attractive, although none shows positive momentum and none is in ‘bargain’ territory yet. It is difficult to time the markets, so investors considering investing in Emerging Markets should look to do a regular savings plan and drip feed money in monthly.
  
Japan – GLG Japan Core Alpha – Stephen Harker remains focused on identifying undervalued companies that have fallen out of favour with investors. His contrarian nature often steers him towards loss-making companies which have underperformed for long periods. He seeks those he believes are sound businesses, capable of a turn around, though such an approach can lead to periods of lacklustre performance.
 
Europe – Jupiter European Special Situations - Cédric de Fonclare, manager of the Jupiter European Special Situations Fund. He specifically seeks businesses he believes will generate earnings in excess of the market average, namely those with solid balance sheets exhibiting high barriers to entry and pricing power. He favours companies who fight to win and retain their business through the superior quality of their products or services, who are likely to prosper even against a tough economic backdrop.
 
Emerging Markets – Newton Emerging Income –  The Newton Emerging Income Fund offers a combination of exposure to fast-growing emerging markets, with the attraction of regular dividends, a sign of company strength and disciplined management. It means companies have to consistently grow earnings and manage their cash prudently, and as the dividend increases, investors should also enjoy some capital growth. The fund has a concentrated portfolio of around 50 stocks, which allows each to have a significant impact on performance, but it is higher risk. Though the fund is predominantly invested in well-established larger companies, any investment in emerging markets is high risk, so a long-term horizon is essential, allowing time to ride out the inevitable ups and downs.

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