Despite my unease about the secular headwinds of debt, bank balance sheets and wage stagnation, I must admit that many of the recent macro data points globally are pointing to growth. This is true in the US, in Europe, in Japan and in China. Below are a few highlights in Europe specifically
As I was preparing to write my annual “Outlook and Forecast” for 2014, I read many different views from major Wall Street firms to get a general feel of the consensus. However, during the course of my research I read one piece of work in particular that tried to build the case that we have entered into a new “secular” bull market as last seen in the early 1980’s. However, while the thesis is interesting, it was based on some flawed assumptions interest rates, valuations and time frames.
By Michael Pettis I recently “debated” twice with senior Chinese officials on the future prospects for China. In both cases they made the argument that Chinese growth rates were going to rise in the next few years and that the current deep pessimism is unwarranted. I argued, of course, that growth would slow even more. Neither of the debates, I […]
I have been an observer of financial markets, and of those who operate within the markets, for almost 30 years. I have never before experienced investors paying more attention to career risk than they do at present. A preoccupation with career risk changes behavioural patterns. Decisions become more defensive, and sometimes less rational.
The bullish argument that houses are now generally affordable also does not hold up on closer examination. As we have repeated ad infinitum the average household has too much debt and is in the midst of deleveraging rather than taking on more debt. Furthermore, households, on average, do not have enough cash for a down payment or a high enough credit score to qualify for the more stringent credit standards put into effect following the credit crisis. Neither do they have enough income.
Jeremy Grantham: “The central truth of the investment business is that investment behavior is driven by career risk. In the professional investment business we are all agents, managing other peoples’ money. The prime directive, as Keynes knew so well, is ﬁrst and last to keep your job. To do this, he explained that you must never, ever be wrong on your own. “
This daily commentary is a bronze-level post. Barclays Capital has a US Macro Data Surprise Index and it was at all time highs in February. It has since dipped.
Faber, Buffett and Grantham were bullish as stocks reached their financial crisis nadir
This is not the time to be fully invested but neither is it the time to be side lined. We are in a nervous market where great opportunities present themselves at regular intervals. We recommend holding 25-50% in cash or cash like instruments (depending on your risk profile) which can be deployed at short notice when those opportunities arise.
n the short term, one of the only remaining stumbling block in the form of the ongoing default proceedings in Greece seem to be no match for the ongoing positive animal spirit of the equity market. Only a week ago, we got news that talks in Greece had stalled, but most recently we have been reassured that talks are back on track.
If I told you that the composition of an average UK equity fund changes by 90% a year, would that startle you? How would you feel if I added that the 20 funds with the highest turnover returned just 4.7% to investors in the 3 years to the end of March 2011 whereas the 20 funds with the lowest turnover returned 16.8% over the same period? From the same source: Out of 1,230 funds across 12 different strategies, only 35 fund managers produced a performance consistent enough to earn their fund a place in the top quartile in each of the last three years (upper half of chart 1). In a universe of 1,230 funds, over a three year period and completely disregarding skill, the expected number of funds consistently ranked in the top quartile is 1,230*0.253=19.22. In other words, more than half the 35 managers were there not because of skill but because, statistically, someone was always likely to ‘over-achieve’.
We have been structurally bearish on equities since Absolute Return Partners was established in 2002. ‘Structurally bearish’ does not imply that we, or our clients, have had no exposure to equities throughout this period. Neither does it mean that we have been expecting equities to post a loss every year for the past nine years. No, ‘structurally bearish’ is a term we (and others) use to express our view on multiple trends. In a structural bear market, price/earnings (P/E) ratios decline; i.e. corporate earnings need to outgrow the decline in valuations for equities to post positive returns. Equity investors are swimming against the tide, so to speak.
Now, nine years after having made that call, we begin to spot real value again with European equities trading at 9.4 times trailing 12-month earnings and 7.6 times next year’s earnings (see chart 3). A price-to-book value just below 1 and a dividend yield of 5.3% does not exactly make the value story any less compelling.