31 January 2012: SH: UK equities: The uncertainty illusion

jan 31, 2012

Minute Read

Volatility in itself is not a risk – real investment risk is the chance of permanently losing some or all of the money that you have invested..

Kevin Murphy and Nick Kirrage, Specialist Value UK Equity Fund managers

For professional investors and advisers only.This document is not suitable for retail

Today, pundits suggest the outlook for both the market and the economy is uncertain. We would contend that the future is always uncertain and that investors’ increased confidence in their predictions when the market is moving slowly upwards is misplaced, as the events of 2007-2009 proved.

This perception of heightened uncertainty has created volatile equity markets. Many share prices are either rising 10% in a day, which excites people because it looks as if large gains can be made very quickly, or else they’re falling 10% in a day, which can seem unnerving to say the least. As disciplined value investors we remember that volatility in itself is not a risk – real investment risk is the chance of permanently losing some or all of the money that you have invested.

Reducing this risk means identifying well-managed companies with strong balance sheets, as this enables them to weather tough trading conditions in the short term. Although risks remain, today’s reality has forced management teams to make hard choices to ensure businesses are prepared for further tough economic times. This is in stark contrast to the recession of 2007 where many businesses were completely unprepared and highly indebted.

Starting valuations are the key to future returns – not the economic backdrop – and while the potential reward from today’s prices may not be as high as in 2009, the solvency risk for many corporates is much lower. As short-term volatilità increases, the value derived from analysing balance sheets and earnings over a long time period is all the more crucial..

Disclaimer:
The views and opinions contained herein are those of the Kevin Murphy and Nick Kirrage, Specialist Value UK Equity Fund managers and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds.

For professional investors and advisers only.This document is not suitable for retail clients.

This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroder Investment Management Ltd (Schroders) does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Schroders has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Schroders has expressed its own views and opinions in this document and these may change. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions. Issued by Schroder Investment Management Limited, 31 Gresham Street, London EC2V 7QA, which is authorised and regulated by the Financial Services Authority. For your security, communications may be taped or monitored.

Source: ETFWorld – Schroders

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