With market volatility back down to more historic levels after spiking in Q3 2011, the time is right for institutional investors to add higher risk companies to their portfolios, according to State Street Global Advisors (SSgA).
Investors should be considering stocks that have high volatility, high beta, smaller capitalisation and higher leverage, said SSgA head of Australian Active Equities Olivia Engel.
During Q4 2011 when volatility was still elevated, SSgA modelling indicated a move away from recent trends such as favouring high quality companies.
"In fact, our models suggested we position into companies that had experienced recent poor performance (forecasting reversal). Q4 did indeed provide a recovery where the market rose 2 per cent," Engel said.
Adding to the bull case is the fact that today’s aggregate market valuations are "the cheapest we have seen since the early 1990s", according to Engel.
SSgA’s Australian Dynamic Equity portfolio has been positioned for a rebound in attractively priced companies with higher levels of risk since the beginning of 2012, said Engel – a theme that "has played out so far".
The preferred sectors for SSgA are steel, iron ore, some consumer discretionary stocks, and some media companies.
Engel was quick to point out that the advice from SSgA was based on a "shorter-term" view of what would be the main drivers of the market in the next three to six months.
