Getting the tactics right
Recent unanticipated events have added weight to the argument in favour of short-term tactical investing, though many still prefer to take a long-term approach.
Immediately after the catastrophic 9.0-magnitude earthquake struck Japan on 11 March, Westerners in the country scrambled aboard chartered flights to escape the nightmare. It is easy to understand why they fled the tragedy, whose death toll is expected to reach 2,500 and which triggered a series of disasters, including a nuclear leak now upgraded to the same potential level as Chernobyl.
However, in the midst of the aftermath a small group of Europeans did the exact opposite and boarded aeroplanes heading straight to the disaster zone. Unpalatable as it may sound, they were wealthy individuals who, having seen Japanese share prices plummet as a result of panic selling – on Monday 14 March the Tokyo Stock Exchange saw 23,500bn yen (E200bn) wiped from its value – spotted an opportunity. “I know some investors that headed directly to Japan to investigate opportunities on the ground,” says Olivier Zucker, founder and managing director of private client consultant Zucker & Co Investment Advisors. “Many people have seen an opportunity to get exposure to Japan.”
Welcome to the world of tactical investing, where lightning-fast reactions to unexpected market events aim to capture value immediately an opportunity flashes up.
Tactical investments, which are relatively fleeting, lasting from between three to six weeks to up to three months, have huge potential to bring short-term profits. Indeed, to take the Japanese example, by 16 March the Tokyo stock market had rebounded. In the current market conditions, with unforeseen events like the turmoil in the Middle East and North Africa fuelling market volatility, it is clear why such tactics are on the rise. So is now the time to abandon long-term strategic investing in favour of shorter-term tactics?
Tactical moves
The recent string of unanticipated market events certainly adds weight to the argument for tactical investments. Consider the macro economic picture. We have rising oil prices sparked by uncertainty in the Middle East and North Africa, overheating emerging markets, currency instability – particularly in the case of the euro – combined with rising inflation and interest rates, including, for example, the European Central Bank’s surprise 0.25 per cent rate hike on 7 April. In this climate it is arguably more difficult to be sure of the results of a long-term investment strategy.
Nicolas de Skowronski, head of investment advisory at Julius Baer in Switzerland, says a tactical approach is necessary at times. “Our recent reallocation of some equity exposure from emerging Asia towards Russia was a tactically influenced reaction to the unrest in Northern Africa driving up energy prices,” he says. “Russia for us is a clear ‘oil play’ and likely to remain so as long as the energy prices maintain their upward pressure.”
Similarly, whilst Julius Baer believes Latin America has strong momentum long-term, it recently took some value out of its investments in the region as it has identified a higher risk of inflation. “We believe the probability of rising inflation has increased to 25 percent and we have adjusted our global portfolio accordingly, adding 3 percent of equities in developed markets for fixed income investments,” says Mr de Skowronski. “Also we have increased our exposure to commodities, apart from gold, as a further hedge against inflation.”
Burkhard Varnholt, chief investment officer at Swiss-based Sarasin, says tactics are essential in today’s financial markets. “We are seeing profound changes in the world, from technological developments we could never have imagined to huge population growth.” The global population grew from 1bn to 7bn in the last century and we are rapidly heading for 9bn, he says. “The nature of the global village we live in means society is much more interlinked and complicated than ever before, so there are more dependencies and correlations in the markets.”
This all means that “small events will have global consequences”, whether for better or worse, and we will continue to see volatility and unexpected market events, according to Mr Varnholt. “As a result there will be opportunities every time something happens and investors will have to judge the situation and place their bets accordingly.”
Strategic decisions
Others are more wary of tactical approaches, though. Mr Zucker, for example, is in favour of investors holding their nerve. “The volatility of the last few months is nothing compared to 2008 or 2002. There is a lot of uncertainty in the system right now but I don’t think we are at the tipping point that would justify short-term reactions.”
He adds that portfolios should be better set up to deal with volatility these days. “Many fund managers have learned lessons in the past few years, which meant that they were not foolish ahead of the current crisis and they were therefore less exposed.”
