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Barclays Wealth on opportunities in volatile markets

Richard Clark and Simon Patterson, Private Bankers at Barclays Wealth, Newcastle look at how volatile markets can bring opportunities for investors calm enough to weather the storm.

It may be too late to bid readers a Happy New Year, but we hope that your 2012 has begun well. In writing our first blog post of the year, we decided to look back at our last one of 2011. This started by us saying: “Barring something unexpected, it’s unlikely returns on risk assets will either be devastatingly bad or spectacularly good over the course of 2012…”

It’s fair to say that this prediction has held up so far. Renewed volatility is still likely. Another EU summit looms, with Greece, and perhaps Portugal, still capable of disappointing. Tensions remain in the Gulf, and the political situation in France is sparking investor questions. But overall it’s been a positive start to 2012 by risk assets, which is not without foundation, and we would continue to recommend that long-term balanced portfolios hold more risk assets and fewer government bonds than usual.

However, there are some important considerations for investors. When times are very stressful and uncertain, we know from our emphasis on behavioural finance, that investor focus tends to shift to what will occur in the short term, and away from calmer reflections on long term, sensible, value opportunities.

This emotionally-induced lack of demand for risky investments drives markets lower than can be justified by a less blinkered evaluation of risk and return. In other words, long term and emotionally resilient investors can take advantage of the temporary anxiety premium caused by the high level of stress, fear and short-sightedness of everyone else in the market.

This is not to say that markets aren’t still risky, they are, but in times of stress, markets are not only pricing in risk, they’re also pricing in the emotional anxiety of all those investors who have taken their eyes off their long term investment goals. So, unless we think that markets are significantly underestimating the true risks, then times of turmoil are good entry points for long term investors.

But what about individual stock selection? Well, another feature of stressed investors with myopic emotional time horizons is that their perspective becomes much less nuanced, fearful investors often flee risky assets as a whole, without discriminating effectively between high and low quality assets.

When markets fall, investors sell the good with the bad. This means that not only is there an anxiety premium for the market as a whole, but that good stocks can be dragged down with all the rest, despite very robust long term prospects.

Thus, at times when stocks as a whole are being shunned there can be a number of hidden gems available at very good prices for those with the knowledge and expertise to unearth them. In the short term they may well continue bouncing up and down with the market as a whole, but a basket of such shares, carefully selected, allows investors to supplement their portfolio with assets purchased at deep long term value, at a time when most market participants are more concerned about short term emotional comfort.

As always, we do emphasise that investing in shares is not for everyone. Their value can fall and you can get back less than you invest. If you are unsure, you should seek independent advice.

This was posted in Bdaily's Members' News section by Richard Clark .