I have been asked recently to comment on the events that follow when a fund manager chooses to close a collective fund and wind it down, paying back all the investors.
Education
Where were you in 1987?
A PS to my recent posts about markets rising when conventional logic says they are too expensive.
Bloomberg today reported that the start to this year has been the best one for the S&P500 since …… 1987.
If you are too young to remember stock markets in 1987 (or for that matter the weather in October that year) refer to Google.
Melt up? (m)
Continuing with a discussion on the apparent optimism reflected in rising stock market valuations, I thought I would post a note on a possible technique for dealing with the pressure to buy that all of use feel in such situations. This stems mainly from the well known psychological bias – the fear of missing out (FOMO).
Reasons to be cheerful?
This year has seen strong rises in most stock markets and previously I have commented that this seems mysterious given all the main risks remain unabated.
I have remained relatively pessimistic largely because of the evidence of company reports and the trend in profits, as well as some plain barmy pricing of new companies coming to market, which has all suggested a disconnection between market sentiment and valuation.
Recently, markets have reacted positively to economic news:
Growth in various major economies, low levels of unemployment, Brexit deferred, low inflation and so on.
Now I will always say that there is no connection in reality between news about economic data (which is often selective and misleading) and the likely long term valuation of investments. Chinese business confidence picking up is for example probably only due to a worried Chinese state pushing banks to lend heavily to the commercial sector!
Of course, real changes like say a US/China trade deal that reduces tariffs will be good for businesses and probably profits, dividends and share prices in selected business sectors. That is a concrete event, something ending with a decent outcome.
But one significant and real measure of secure economic growth is action by central banks to control it – putting up interest rates. That is not happening and in fact recent decisions suggest rate rises are being pushed back.
Retaining cash while markets keep rising requires an iron discipline. Remember that you have other money invested, so even if markets are not going to fall back, you will only miss out on returns on a portion of your funds. That cost is an insurance premium.
Personally, having lived through this sort of market valuation pattern at the turn of the Millennium, I am happy to buy insurance and keep plenty of cash ready for a sell off. I still think the probability remains on the balance of the known facts. New purchases might be made cautiously on the ‘drip feed’ basis, but I am not even contemplating that yet.
Don’t look back in anger (m)
Brexit Delay – implications for investors
The Brexit show moves on like a cup of tea – an analogy I heard used by a Lithuanian political commentator. The idea being that you can leave the tea bag in the cup (UK in Europe) as long as you like now, up until October 31st anyway, and when you take it out will just mean the tea is stronger or weaker, hotter or colder. All a matter of (political) taste.
The immediate reaction of stock markets is a bit like that of the woman to the noisy arrival of a husband who has come home drunk so many times now, it is only remarkable if he comes home sober!
So what might shock markets would be some well supported concrete decisions from the UK government and some definite changes with actual guaranteed dates attached.
In the short term, we will need to see if Mrs May is really prepared for a fight with the hard Brexiteers and if she is prepared to seeks an element of support from the Opposition in defeating them. That would be pragmatic but I personally think not very likely.
Should investors assess the markets as now carrying less risk? Absolutely not. Other economic news has got worse. Markets may rise in the short term because they are set in that groove, but growth in asset prices like we have got used to is unsustainable and I would be using any unexpected spike up to bank more profits.
If you disagree and want to buy the cheapest assets, then probably certain segments of the UK market are the best value, but I would only drip feed money in very slowly.
On the currency front, which is still a very relevant consideration in the light of global trade disturbances, one should look to see where interest rates will rise first and the US is not so much the certainty that it was. Trump may well be pressurising the Fed not to do what it ought to in the light of US economic data. How long that can last is anyone’s guess.
Having said that, if I were buying global funds at the moment I would concentrate on global players with plenty of cash in hand and incomes and share prices in US dollars. As a diversifier for higher risk investors, Japan looks logical.