Advisers can step up in market volatility

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New Zealand is likely to continue to feel some knock-on effect of the turmoil on international markets this week.

Wednesday, January 6th 2016, 6:00AM 2 Comments

by Susan Edmunds

Chinese authorities put a stop to trading when weak manufacturing data and Middle Eastern tensions combined to create a 7% drop in China's market.

That had a flow-on effect on the European and US markets, and the NZX to a lesser extent.

London's FTSE100 fell 2.4%. The Dow Jones threatened to get off to the worst start to the year since 1932 before clawing back some of the losses to finish down 1.6%. The S&P500 fell 1.5%. 

In New Zealand, the S&P/NZX500 slipped 0.7%. Twenty-six stocks on the index fell.

John Berry, of Pathfinder Asset Management, said it was likely that New Zealand would continue to be dragged down if there was a sustained sell-off in international markets.

But he said a bigger question was why there had been a sell-off.  “The market has been driven down by a dramatic fall in China and continued concerns about its economic growth. If the data shows economic growth is consistently weaker than expected then it will impact all markets including NZ. Chinese economic weakness is one of the biggest risks for equity markets globally  in 2016.”

Michael Haddad, Senior Portfolio Manager, Peters MacGregor Capital Management, said investors should not be worried by movements of 1% or 2%.

“Provided investors own quality assets that are sensibly priced, and have appropriate overall asset allocation mix that reflects their risk preferences and cashflow requirements, they should be able to comfortably ride out any short-term market volatility.  Value-oriented investors may rationally recognise more dramatic market declines or dislocations as opportunities to prudently add to positions.”

He said weakening markets with increasing dispersion were an ideal environment for stock-picking.

But he said it was a chance for advisers to show their value. “The average investor does worse than average because they increase exposure to the market when it has been strong and the most marginal investors become spooked and exit the market after major declines,” he said.

“My personal view is that the most important aspect of a financial adviser's role is seeing the client through the full market cycle.  A good adviser may on average generate 1% or 2% per annum in additional returns through prudent asset allocation and selecting good funds or stocks.  But this is dwarfed by the value add of not having a client liquidate immediately following a one-in-10 or one-in-20 year market dislocation, as so many investors inevitably do.”

Tags: equities NZX

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