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TRENDS IN 2008: OUR VIEW December 2007
Stephen Davis, Director
Economists who a year ago predicted how 2007 would unfurl were stymied by the severity of the sub-prime crisis.
It is this credit squeeze that has caused great uncertainty in developed global markets and there is still a real concern that the full extent of this crisis remains hidden. In the event that further losses are revealed, there are additional concerns relating to how the markets will react.
It is against this economic uncertainly, that any predictions for 2008 need to be tempered.
It is reasonably expected that investors, either on their own initiative or on advice from asset managers, will move towards “safer” havens which , broadly speaking, will involve “funds of funds” across most asset classes.
These havens are specifically distinguished from the traditional “safe” havens of cash and bonds, which are currently delivering relatively minimal returns. Indeed cash, gilts and corporate bonds are, in general terms, delivering similar returns. The private investor in 2008 will therefore want to increase returns without significantly increasing risk.
This is where funds of funds come to the fore. Investors will still, for example, be able to invest in traditional asset classes, but can reduce the volatility of the investment by investing in numerous funds with different strategies. This has the effect of creating a better balance, and can minimise, for example, the concern investors may have regarding long only equity managers, whose investment approach is based on a single defined strategy.
The same approach should be adopted with regard to alternative asset classes, such as hedge and private equity funds.
This means that 2008 should see portfolio re-weightings with increased exposure to these types of lower volatility funds of funds and decreased exposure to bonds and direct equities.
The continuing uncertainty should present good opportunities for investors in all asset classes, as nervous investors suddenly bail out of specific investments. A recent example was British Land’s falling share price, which declined from a high of £17.21 on 2 January 2007, to a low of £8.20 per share on 19 November, before climbing back to £9.75 per share on 10 December.
Commercial property in the UK will continue to come under sever scrutiny in 2008 but it remains to be seen what the real effect of the credit squeeze will be on this sector. Rents do not appear to be declining as yet, thus supporting gross values, but we need to see what Q1 brings and whether lease incentives start growing and valuations declining.
