It is times like these when investors are tempted to reposition portfolios quickly.
The outbreak of the conflict between the US-Israel and Iran has sparked further market volatility and ‘risk-off’ sentiment but reacting too quickly to geopolitical shocks can be counterproductive, according to Andrew Dale, partner at ECP Asset Management.
“Markets and investors alike despise uncertainty, which destabilises the market. However, there is no crystal-ball for investors to show the implications of this conflict over the long-term.
“It is times like these when investors are tempted to reposition portfolios quickly, sparking knee-jerk reactions and sell-offs. However, markets require time to process the ‘new information’.
“Long-term investors should remain disciplined and focused on sticking by their investment process and philosophy, rather than making rash decisions and rushing to investing now in energy companies because of the rising oil price,” he says.
Uncertainty in the market has been a feature for the past 12 months, which Dale says triggered the rotation out of growth stocks and into value, particularly for software-related companies coming under a lot of pressure from artificial intelligence (AI).
“This past year, investors have been questioning the valuation of many growth companies.
“During the first part of reporting season tech-heavy names were down 30 to 50 per cent, while higher quality growth names were down around 20 per cent. But by the second half of reporting season, we saw companies starting to deliver a reasonable result, providing a constructive outlook to re-enter some of those high-quality growth stories,” he says.
Dale says investors should lean toward defensible growth such as healthcare and industrials, as well as banks.
Within healthcare, Dale points out sleep-apnoea device manufacturer ResMed which has a defensible earnings stream. In banking, he says traditional banking stocks such as CBA are a good safe haven for investors.
“When economies are booming, investors look elsewhere but when there is a slowdown, banks tend to be a relatively good safe haven for investors. This is especially true for the Australian market, where we are experiencing sticky inflation and a rate hiking trajectory.
“Companies like CBA will continue to provide a defensible position, but investors should not expect these companies to go up in double digits,” says Dale.
Other safe havens during market volatility include resources. Dale says investors should focus on the diversified play in resources.
“I think that once the market gets through this dislocation in the Middle East, companies like Rio and BHP will be the best way to play the resource rally,” says Dale.