Global threats causing market uncertainty

The impact of the financial crisis of 2008/9 still looms large, although markets have gone up over the last five or so years.

The fear of an ebola virus epidemic, as well as geo-political threats, are causing markets to pause for breath producing some uncertainty over which way markets are to go.

However, recently markets have paused for breath and there is some uncertainty about their future direction. This raises some obvious questions.

Could lingering worries, such as Ebola, lower global growth forecasts and geo-political threats finally creep into markets? The answer, is maybe yes and maybe no.

Sign up to our Business newsletter

Sign up to our Business newsletter

In the third quarter of 2014, the investment company sector proved resilient, with performance up 1.84 per cent compared to a fall of one per cent for the FTSE All Share. This was the second quarter this year that the investment company sector outperformed the FTSE All Share, perhaps due to its higher overseas exposure, as analysts at Winterflood Securities point out.

Indeed, investment companies in the Asia Pacific and Global sectors experienced a good third quarter, and some sector specialists have had a very strong run of performance too. The Sector Specialist: Biotechnology and Healthcare sector was up an eye-watering 12 per cent in the three months to end September.

Interestingly, analysts at Oriel issued a research note on this sector, explaining that despite very strong performance over recent years, discounts in the sector had recently widened, perhaps an opportunity for those still bullish on the sector.

However, they added that, considering the very strong performance of the Sector Specialist: Biotechnology and Healthcare, it was not for those investors who are “scared of heights”.

Investment company sectors which have underperformed in the third quarter include Europe and the UK, as well as Sector Specialist: Commodities and Natural Resources and North American Smaller Companies.

Interestingly, while the FTSE All Share declined in the third quarter, investment company discounts, which can have a correlation with wider markets, narrowed slightly and remain at historically tight levels (5.5 per cent at the end of September, according to Winterflood Securities, compared to 5.9 per cent in June).

In other words, sentiment towards the investment company sector remains strong, and while the average discount has widened since the start of the year they are still, on average, at historic lows.

Certainly, industry assets remain at an all-time high, with the investment company sector at over £118bn. It’s hard to believe that it was only in January 2013 that the investment company sector’s industry assets broke the £100bn barrier for the first time.

But should investors be concerned, given creeping global worries which could, to some, suggest that better buying opportunities might be ahead?

Well, we don’t know the answer to that question, but it’s worth remembering that investing is for the long term. Alan Brierley, an investment company analyst at Canaccord Genuity, recently summed things up well when he said: “The message when choosing an investment should not be whether it is trading on a five per cent discount or a seven per cent discount, discounts should not be a key driver: [investors] should identify quality and put it in the bottom drawer. Buy it and hold it for the long term.”

Investment companies have performed strongly over the long-term but can suffer short-term periods of volatility and need to be part of a balanced portfolio. If you are unsure about whether investment companies are suitable for you, consult a financial adviser. Whatever the outlook for markets, it’s that long-term view which remains the most important, and which is too easily forgotten when times get tougher.