Do plenty of research into the global economy, seek out opposing views to test your resilience, and then let your instincts be the guide
If you are the type of person who comes alive when the dinner-table talk turns to prospects for the global economy, you may be pleasantly surprised at how easy it is to turn your views into a simple-to-manage investment portfolio.
First, and assuming you have done your financial-planning basics — identifying your appetite for risk and when you will need to access your money — a few key metrics can go a long way towards informing your big-picture, or macro, view.
Adam Laird, of Hargreaves Lansdown, the adviser, lists gross domestic product (GDP), interest rates, inflation and employment data as the key guides to a country’s economic health.
All (and a great deal more) are available to check for free at the website tradingeconomics.com. The World Bank provides regular GDP forecasts — just search for World Bank forecasts, then click on the forecast tab.
Having acquired an informed macroeconomic view, testing it in dinner-party conversation with friends who are also investors, and addressing those who turn out to be your critics, might not be a bad next step.
“Seek out an alternative view to test your position; if you’re naturally bullish, seek out a bearish opinion,” says Rob Morgan, an investment analyst at Charles Stanley, the wealth manager.
Assuming you pass this test, it is time to implement your view in an asset-allocation strategy. When it comes to equity allocations, consider a couple of pointers:
1 Successfully picking countries that end up growing won’t necessarily make you rich. If a lot of other investors have done the same, future profits may be priced into share prices already. The ratio of price-to-earnings (p/e), another of Mr Laird’s key measures, gives an indication of how individual stocks and the wider index are priced. A low ratio means investors are broadly pessimistic about the prospects for the company or market; a high ratio means that sentiment is optimistic.
Google the company name plus “Morningstar price earnings” to find details for individual stocks. For indices, the p/e ratios can typically be found on the PDF factsheet published by the index company, says Mr Laird.
2 A second handy rule of thumb is that, for developed markets, the larger the company, the smaller the share of revenues likely to come from its home country. In any given quarter, companies in the FTSE 100 typically derive between two thirds and three quarters of their revenue from overseas, so the FTSE 100 is not the place to go for a bet on UK growth.
“For exposure to the domestic economy, look to the small and mid-cap stocks,” says Shaun Port, the chief investment officer of Nutmeg, the investment platform. He recommends starting with the FTSE 250 and working down in size from there.
3 Choosing how to access the stock markets that you like is the next task. Active managers typically combine their stock picking with a macroeconomic view, which might be at odds with yours.
Besides, if you’re the type who builds their own asset-allocation model, the fact that the vast majority of active funds underperform the index after fees probably won’t have passed you by. For the same reasons you should beware of the lure of choosing individual stocks yourself; the odds are against you too.
For passive exposure, exchange-traded funds (ETFs) are hard to beat, reckons Mr Port.
“They provide diversified exposure to a market, meaning you reduce your stock-specific risk and volatility, leaving you to focus on asset allocation,” he says.
They are also a cheap way to rebalance your portfolio. If an individual stock you hold does particularly well, it will become an increasing proportion of what you own, creating a concentration risk. Selling some of the stock and redistributing the gains elsewhere in your portfolio returns the equilibrium.
ETFs perform this rebalancing automatically; doing it yourself on your own stock portfolio quickly gets expensive. Share-dealing fees on the platforms — Bestinvest charges £7.50 a trade, Nutmeg £10 and Hargreaves Lansdown £11.95 — will soon start eating into your investment returns. When it comes to emerging markets, the benefits of stock picking are more nuanced. The accepted wisdom is that with emerging-markets status comes greater inefficiency and, in theory, more room for active managers — including you — to add value. However, the best active funds quickly fill up, says Mr Laird, closing to new investors and leaving you the pick of a bad bunch.
China is a country where buying the index has drawbacks, says Mr Morgan. “It is dominated by state-owned companies that are relatively inefficient and seldom run exclusively for shareholders.”
He favours entrepreneurial companies with lower weightings in the index. If you share Mr Morgan’s concerns about China, avoid Asia-wide funds, whether active or passive.
If you are looking to lay a bet that an emerging economy is set for rapid growth — a popular approach — concentrate on markets where the indices include a good number of financial and consumer firms, says Mr Port, because these are well placed to turn economic growth into company profits.
Look also for a liberalised financial sector, strong population growth and strong income growth. In all cases India and Indonesia will fare better than China, he suggests.
Regardless of where you end up investing, the final word is to stick to your guns and avoid the short-term distractions of the news agenda or market turbulence, advises Mr Morgan.