Reflecting on the past couple of weeks I can’t help being reminded of the old gag that markets have correctly predicted nine of the last five recessions.
It’s a fundamental principle of investing that markets don’t always act rationally. Sometimes they get things wrong; usually they overreact in the short-term.
Often this is a good thing for a fund manager. Ultimately markets are self-correcting in the longer-term. As a result windows of opportunity open for the astute manager to sell when they feel assets are overpriced and buy when they feel assets are underpriced.
One of the advantages of managing a multi-asset portfolio is that it gives you chance to switch between asset classes to maximise these opportunities.
Heading into the recent bout of turbulence we held over 17% cash in the T. Bailey Defensive Cautious Managed Fund– largely through our reluctance to allocate to the traditionally perceived safe havens of sovereign debt. With the FTSE 100 under 5000 an opportunity opened up to bring that cash down and selectively buy good equity funds (increasing US and Emerging Market exposure and buying the BlackRock Gold & General Fund – gold equities have lagged the price of gold itself, and appear to represent attractive value relative to bullion).
But markets can be infuriating too. Sometimes the arguments for avoiding an asset are screamingly obvious and yet markets persist in rewarding what can seem totally irrational.
Our aversion to sovereign debt is nothing new – the risks have appeared too great for many months, the rewards too little. And yet US treasuries, instruments recently downgraded by S&P, rode through the recent turbulence on a wave of deflationary fear with yields falling on 10 year treasuries to below 2% as their prices rose.
Similarly for UK Gilts, to invest in a low nominal yield on a term of say 10 years requires quite some confidence that inflation will be muted for the next decade, especially given current CPI of 4.4%. At the same time, UK equities are offering a historic yield on “real” assets of over 3.5%.
Of course investors in the short term are concerned that the markets could tumble further. Memories of 2008 have been stirred. But this is not 2008. Credit markets appear to be functioning with greater liquidity; companies are not so heavily leveraged; company inventories are not as high either. Companies that survived 2008 are leaner and fitter.
The 2008 crisis was a liquidity crisis. Banks weren’t willing to lend to each other and investors were extremely wary of leaving money with them. Now, outside of the Eurozone at least, we have the bizarre situation where the Bank of New York has told clients with more than $50m in cash to deposit that it will charge them for holding it.
Sometimes we can listen too hard trying to catch history rhyming with itself.
Longer-term investors moving into equities now could look back on this period as a good buying opportunity. And those buying sovereign debt now may live to regret it.
But it could be some time before such logic is reflected in valuations and this forecast comes to be realised – and we could be in for more ups and downs in the meantime. That’s the enticing and infuriating way markets behave.
Submitted by: Elliot Farley
Websites are all very well, but sometimes only a very knowledgeable human will do. Please leave your details, and we’ll call you back.
Request call backLearn more about our truly bespoke alternative to mainstream ACD and
fund administration
services.
The value of your investment and the income derived from it can go down as well as up, and you may not get back the money you invested. When investing in retail unit classes, capital appreciation will be affected by the impact of initial charges and you should therefore view your investment as a medium to long-term holding.