In Focus: Colin Tipping, Friends Provident International

Colin Tipping - Director of Investments and CIO, Friends Provident International speaks with Vipanchi about the Global Economy and his insights for 2015

By Vipanchi Dinavahi

We have just entered Q1. What’s the economic weather like?
The thing is with this time of year, everyone is looking for something different. Everyone thinks: “it is a new year, what has changed?” There are new strategies, ideas, themes coming to the fore. But the key thing from a global, macroeconomic point of view is that 2015 is looking, in many areas, what was starting to emerge in 2014. So the big theme, and the word I use a lot at the moment, is divergence. Divergence between markets and economies as well as stock markets. 
Last year we saw markets getting a little bit ahead of themselves, there was a lot of anticipation of what the Central Banks  were doing, and so how much will  interest rates be raised, will they be raised by too much, too quickly? What would be the knock-on effect because of that? A lot of discussion especially during Q4 around the European Central Bank and what would they do. In the last few days we have seen this come to fruition. 
So what does that tell us? The economy is quite mixed; there are a lot of different pictures emerging - at the top macro level, overall, you are still seeing growth – probably still improving growth. Maybe a little slower than you would have thought. IMF in the past week has just issued a revised global growth forecast of about 3.7%. So down a little bit from what you probably anticipated, but still strong enough for this stage of the cycle.
At one end of the spectrum you have the US which  is  strong and recovering  quickly, you have the UK coming up a bit behind that but not quite as strong, and if you separate the UK from the rest of Europe – that is quite an important piece especially given where Europe the deflation story has really been the trigger, they have been talking about it for a long time, when a trillion Euros will be coming into the market, so that is going to have some very interesting knock-on effects into the stock markets. 
The one thing I say to people is: don’t confuse the economy with the stock market because they are two quite different things.
Yes, investors will spend a lot of time thinking about what is going on from an  economic perspective but the reality is that markets normally operate quite independently, they do get a bit out of sync. So one of the things I worried about last year was the stock markets in particular were getting ahead of the economic story – they were pricing in too much growth too fast. Equally when we got to October 2014, there was a lot of volatility whereby worries about China in particular were starting to emerge.  So those mixed messages are continuing into 2015, but the top level story is that generally speaking, strong growth but with very divergent experiences across  economies. 
Generally speaking, you have growth re-emerging, it is not happening as strongly or as quickly as people would have been forecasting last year, and that has triggered IMF and another few observers to recount. So if you make that connection between the economies, the American story and the markets, it is a year that people can make money and see positive returns – probably not as strongly driven as you would have seen beforehand.
What is your opinion of Asia & Emerging markets?
I think you really need to be quite careful there. Another thing that we talk about is selectivity, being really careful with your selection. This idea of divergence also plays out into the emerging markets because you are possibly seeing two extremes here: those that are dollar-dependent and those that are oil-dependent. 
Those emerging economies that are importers of oil, for example, will be at a relatively good position from an economic point of view, so you will see that stimulus, more spending. In particular, those economies that have moved towards a more consumer-based economy. 
We are seeing a move away from stimulus and investment from the government to a more entrepreneurial mindset: own our own businesses, much more focused on the stake holder, share holders’ rights, corporate governance is a feature of the Chinese economy. So you are seeing growth coming down to only 7% or so. That is still a very strong growth rate. It is not double digits, what we are used to, and accountants will say that people have been conditioned to get used to very high growth rates and economies are expanding in China and emerging markets, we are seeing more dependency on the consumer and, naturally, you can’t have a consumer based economy growing at that rate.
What strategies should one apply when considering emerging economies?
In some economies, you would not want a high beta-type strategy in a sense that the economy is growing well, the stock markets should be doing well for index to that stock market... I think that is a mistake at the moment.
If you are looking at emerging markets as a strategy, certainly you will still see growth within that, you will still see investment opportunities, and probably more so from stocks specifically. Most of our managers are saying that emerging markets is a very much stock-picking environment at the moment. Simply taking a market bet on emerging markets as active is not going to work that well for you, because you have this divergence between the dollar impact, so economies are going to benefit from the strong dollar – again, be very specific about in terms of the stocks you are picking within the funds, what is their dependency, know technology driven and possibly the more market developed financials, countries that are oil dependent, exporters are going to suffer obviously, in terms of their dependence on revenue from oil exports, for example they need to balance those kind of things. 
So there are a number of different stories; you have to really think about your due diligence on what are the strategies for your investments that you are selecting for your customers if you are an advisor for example. As I say, the selection process is very important this year.
What is the implication of current Geopolitics on the economy?
There are certainly implications from the political environment at the moment. At certain times you see markets get jittery, they are normally predicated on sentiment rather than fundamentals – that is a key difference there... if you look at 2014, there was a lot of noise, geo-political activity going on (Middle East and Ukraine), it was a distraction. 
The truth of the matter is that so far geo-politics have not really impacted markets – it does take a lot of air time, creates a lot of noise, we need to be very wary of it, but in terms of actual impact, apart from the appearance of volatility, you tend to not really see that implication. 
I think in terms of strategy and implications, from a  geopolitics perspective, you inevitably will see more activity this year, you will see distractions, I personally believe that we will see more positive news, and that sets a good context for investors, the way people are interpreting political events. On the flip side, you often find that the crisis-type scenarios have a magnifying effect – the effect of Greece on the world economy should not really be that much. Middle East also, where for example  you may see positive news around Iran -  that said you are never going to have complete stability, but if it can be less volatile, it becomes the right  environment for people to focus more on the fundamentals from an investment point of view. Dreadful as the situation is, it probably is not getting the type of political attention it should do. Is it affecting the world economy? More from the point of view of the negative aspect of sanctions against Russia. There is always a question, just a matter of where it sits with them.
At the Chamber we have many members who are a financial advisors. What advice do you have for them in 2015?
There are some takeaways that I think advisors should have at the forefront of their minds this year. It is about expectations – setting them with customers and maintaining them and keeping them fresh. Markets have been at or near all-time highs so inevitably you will have a period of adjustment, so there are opportunities to make money for your customers this year if you are selective... I cannot stress that enough. 
I don’t see much advantage of just jumping onto a high beta market strategy and hoping for the best. You have to do your homework; you have to be able to resource and do the due diligence yourself or rely on the experts to do that. We have a big team of experts that do this; we do that heavy lifting for you as an advisor. So be selective with your customers’ investment strategies, manage their expectations –  they are going to see opportunities in 2015 but not massive upsides in markets. 
Against  the background of positive robust growth  in certain developed markets , there is very fragile growth in other markets and the threat of disinflation and even deflation in others  which takes the economic story backwards a little bit. So it is a picture you really have to set your strategy with your customer, keep your expectations realistic and revisiting it. That should be a reflection of what is your customer’s objective, is it wealth preservation or accumulation? What is the risk appetite of your customer, in terms of downside? If customers are using an investment strategy to accumulate wealth, then do not worry about short term volatility, which you will see in the markets this year. It might be due to geopolitical aspects but more probably  about market reaction to uncertainty. We have had a good global market in terms of a few asset classes, and I think advisors will  earn their fees this year by really understanding their customer’s objectives and keeping their customers from making  mistakes.
Advice really is the advisor’s product nowadays when you see what is happening on the markets front. Of course as a provider you must have good products  and good investments and funds to execute your investment ideas. And the way to think about that is to understand what is happening in capital markets. What is happening in the economy is that we are tapping into the macro picture -  the influences on that can be geopolitical but  we also look at where the capital is flowing, so I spend a lot of time looking at open positions in the derivatives  markets; we look at where smart money including, hedge funds and Exchanage traded products (ETPs)  is going. 
Last year we saw a lot of new money being created in ETPs in Japan, and typically you will see these high beta type strategies very early in the cycle. So they were anticipating what was happening in the market  The retail investor will typically come after that,  that’s what you are seeing at the moment  and that’s – where the good stock picking comes in. We had a very good run last year in China at the market level but going forward  you will need to be  more  stock and sector specific rather than simply a market-led upside. You will still see opportunities, and that is why active selection is so important.