‘Wall of Worry’ in 2016 investment can be overcome

In investment circles the term “climbing the wall of worry” is used to explain how threats to positive returns are considered. Everyone knows that financial assets, and especially equities, are prone to negative newsflow and developments that can adversely affect prices.

Understanding those risks is a core task for anyone managing their own or someone else’s money.

For 2016 the wall of worry has a lot of bricks built in to it.

You can start with China, which endured a bruising 7% sell off in its equity market on Monday after a poor manufacturing index reading was published.

Having the gigantic Chinese economy stable and growing would be a benign backdrop for equities globally during 2016.

A stumbling China would have the opposite effect.

Across the developed world, both the UK and US are coming off over two years of strong growth in GDP and employment.

Any reversals in those trends will be monitored closely.

Other macr-economic factors to watch include currency movements, which were volatile during 2015 and particularly troublesome for emerging economies.

Interest rates are starting to rise in the US but are firmly rooted to the floor in the rest of the world.

A rise in interest rates should mark a recovery in economic momentum, but it also carries the risk of higher funding costs for companies and countries with high levels of leverage.

Alongside these factors, investors also have to delve in to the threats that face individual companies as these could undermine share prices as the year unfolds.

Competition, bad decisions by management, and operational efficiency are elements that must be weighed up before calculations around how corporates are valued.

Over the past four years an extended period of cheap money globally has inflated the multiple of profits paid by investors for companies.

This has changed the pricing of risk and leaves companies with share prices that have created Price Earnings multiples not seen for a long time.

To justify and increase their share prices further companies will have to, at least, meet analyst forecasts for 2016 and preferably exceed expectations, possibly through corporate activity, including acquisitions.

This long list of worries may put many off the idea of investing in equities at all but these types of hurdles exist every year and help explain why equities are the most riskiest and volatile assets of all over the long term.

Handling them carefully is a key attribute in any portfolio.

Diversification is an important component in prudent investing and 2015 provided stark proof of that. Commodities sank while equities and property rose.

Having a mix of assets across bonds, equities, property, cash and commodities is a wise approach.

Around this mix, too, keep an eye on the annual dividend or coupon that can be attained as regular dividend income is a key driver of long-term returns.

In the present environment it is particularly challenging to find assets that generate safe and generous annual income.

Another trick to consider is known as Average Euro Investing.

This involves committing funds to investing on a regular basis, perhaps quarterly, into a chosen range of assets.

By investing on a regular basis you can smooth out the effect of volatility by buying through good times and bad.

This has proven to be more effective than, say, putting a slab of cash to work just once every year as you could enter the market at a short-term high point which affects the ability of your money to perform.

Whatever the approach, overlay all of your thinking about investment with a plan that utilises the generous tax breaks provided by Government.

Your assets have to sweat a lot to generate a 5%-10% return but you can get an almost 50% tax break on investing if routed through a pension vehicle.

It is a no-brainer to use this incentive and it ensures your money is committed to building a nest egg that creates its own windows of opportunity at a later point in your career.

Joe Gill is Director of Corporate Broking with Goodbody Stockbrokers.

His views are personal.


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