With apologies to the Bard, we are currently experiencing very choppy markets and the conclusions we have come to from our various investment meetings are that patience is the better part of valour; simply, to try and time these markets is just too difficult. The chances are too great that it could lead to large potential losses for clients, either on a realised loss basis, or in the form of an opportunity cost.
As such, our view is that sitting close to our long-term strategic benchmarks and not trying to be too clever is the prudent strategy.
Some cynics may argue that markets are always tricky, so why is the current environment any harder than normal? My response would simply be that central banks have distorted the playing field to such an extent (through QE and other measures) that fundamentals in this environment have ceased to be relevant, as investors salivate for ever more free money from central bankers.
We are certainly not alone in this regard. After a recent Credit Suisse road trip, in which they met with clients in the US, Europe and Asia, they had reported the following about their meetings: “Never have we seen so many clients who just don’t know what is happening and have cashed-up.”, “Clients are lost and bearish.”
So why are investors feelings so “lost” at the moment?
The outlook for global growth is constantly being downgraded; Chinese growth is losing steam (see chart above) and even then it is not wholly believed. Meanwhile, the US Federal Reserve (“the Fed”) is in the process of potentially raising rates, but their communication is muddled and confusing, leaving many investors to question whether monetary policy is the miracle cure. Revenue growth in the US is disappointing (and it’s not just the oil sector), as inflation continues to fall everywhere and deflation concerns grow daily.
Nevertheless, despite continuous weakening fundamentals, markets have bounced back aggressively from their lows in August 2015, possibly because of the situation recently voiced by a number of cynical investors, that these are “TINA” (There Is No Alternative) markets. Central banks have forced savers into riskier assets, with traditional safe haven investments offering no return, hence why equities continue to be well bid on pull-backs.
Another aspect supporting markets is valuations, with equities in Europe, Japan and Emerging Markets offering attractive entry points for the long-term investor. It is for this reason we continue to remain invested in equities, despite obvious weakening fundamentals. By the same token, we are not ‘betting the farm’, as a rising rate environment and a weakening Chinese economy does not bode well for risk assets, especially if investors start to question whether central banks can really pull a ‘rabbit out of the hat’.
To Tinker or Not to Tinker?
