Newly appointed Deputy CEO of VM Wealth Management and VM Investments Limited, Brian Frazer, is encouraging investors, particularly those in it for the long haul, to maintain course a little longer despite the pressure on some portfolios as markets soften.
Frazer, who made his d?but on VM Wealth Management’s investment series VM Wealth Talk on Thursday, following his departure from Scotia Investments Jamaica Limited in September after two decades, urged investors to ignore their nagging fear of portfolios going bust from choppy market conditions.
Instead, he argued that the downturn in the local market, along with a looming recession in the United States, provides an opportunity to reap rewards.
“Pension trustees, for example, tends to get jittery at this point when they see negative returns in fixed income, negative returns in equity. But at this point I want to remind you to stay the course, look at long-term objectives, look at asset allocation and ensure that you stick to it and be disciplined at this time,” he said.
There is an expectation that the US and other economies may enter recession by the middle of next year, due to rising interest rates, elevated commodity prices, bond prices taking a beating, and falling stock prices.
Still, the effects are not expected to be too severe.
Locally, Senior Economics Lecturer Dr Andre Haughton, who was also a guest speaker at the VM event, foresees Jamaica being spared from recession but said volatile market conditions are expected to continue for another 12 to 18 months.
“Although we are very focused on what’s happening in the next 12 months because we are taking a long-term view, the focus shouldn’t be just on next year when we think there will be a recession. We need to look beyond that at the asset classes that performed well in a recession but also after the recovery because you want to ensure that your portfolio is structured to take advantage of the recovery,” said Frazer.
“Market data shows that typically, the US market underperforms one year prior to recession and then about 12 to 24 months thereafter this market delivered returns in excess of 45 to 80 per cent. So again, what we are saying to our long-term investors is to remain in the market so that you can participate in the recovery,” he said.
Beating volatile market conditions over the long term begins with strategic asset allocation, said the VMIL executive, adding that securities selection is a far second, followed by market timing, and other factors.
For those other already in the fixed income market, Frazer is encouraging investors to maintain exposure to local variable rates and short duration bonds over the short to medium term, to capitalise on elevated rates. As local and US interest rates peak, investors are being advised to rebalance into bonds with longer maturing and to later focus on high credit quality – preferably investment-grade over high-yield – heading into the recession.
Interest rates in the US are expected to peak at 5 per cent by second quarter of 2023, and stay elevated up to around the first quarter of 2024.
Locally, expectations are that interest rates will peak earlier, possibly in by March 2023, between 7 and 8 per cent. The policy rate is currently at 6.5 per cent.
“We believe this will be case because if you recall, our central bank started raising rates early, which was a key factor in the appreciation in the Jamaican dollar year to date. Based on how soon our central bank started raising rates, we would have seen an appreciation against most of the major currencies,” said Frazer.
“However, if BOJ were to pause before the Fed then we could see some amount of depreciation going forward, and as such, from a diversification perspective, we’ll encourage investors to maintain exposure to hard currency bonds,” Frazer said.
The Fed is a reference to America’s central bank, known as the Federal Reserve.
As for long-term equity market investors, the Deputy CEO recommends rotating into fundamentally good companies on the local stock market that are undervalued. The focus, he said, should be on companies with good long-term fundamentals, good practices, and good management structures and that investors continue to keep watch on sectors that are expected to outperform once the local market rebounds, including tourism.
The approach for investors holding US equities would be a little different, given the looming recession.
“My advice would be to rotate into defensive stocks that outperform a recession and to rotate into other cyclical and growth stocks when the US economy moves into recovery. They say cash is king, but for me, do not stay on the sideline with your cash. You need to put that cash to work in the market so that you don’t miss out on the recovery after the recession,” he said.
He is also encouraging long-term investors, particularly pension funds, to maintain some exposure to alternative investments, including real estate but preferably the commercial segment.