“Currency Manipulation is what Bertrand Russell called an “emotive conjugation” and Bernard Woolley called an “irregular verb”:* I am cutting interest rates* You are trying to achieve a competitive devaluation* He/she/it is manipulating their currency to obtain an unfair advantage”. – John Kemp (Analyst)
“The things that will destroy America are prosperity-at-any-price, peace-at-any-price, safety-first instead of duty-first, the love of soft living, and the get-rich-quick theory of life” – Theodore Roosevelt. As we discussed last week, professional investors (a very loose term), are remaining bearish on US equities, but they are by no means alone. In this market cycle, far from becoming euphoric, investors are becoming ever more concerned/worried/anxious as prices rise higher. It IS an unusual state of affairs and heightened by the financial media’s constant doom-laden headlines; sometimes it appears that investors won’t fully relax until there’s a crash!
“If there must be madness, something may be said for having it on a heroic scale” – J.K Galbraith (The Great Crash of 1929). There has been plenty of negative news over the last few months and an even bigger list of issues over the last year or so, but (US) markets appear blithely unconcerned; despite the litany of calls for a decline, (or a crash), nothing appears to dent sentiment and the buying continues.
One of the major problems Advisors (and ourselves) face is the expectations of clients. Fuelled by the relentless media focus on outsized gains in some individual assets, (mostly equities), investors imagine that these gains are easily made and thus they should get involved too. The fact is that they are abnormal (or they would not be news at all), but that is not what the media imply. Of course, fund managers are happy to play along, as they judge that this increases the interest in their products and this article contributes to this phenomenon, with the fund manager telling us that Inflation plus 5% is a “realistic and achievable goal”. The chart below does not break down the asset class exposure, but it can be found here.
Hubris is interesting because you get people who are often very clever, very powerful, have achieved great things, and then something goes wrong – they just don’t know when to stop – Margaret MacMillan (Canadian historian and Oxford University Professor). [The following analysis focusses on equities for the sake of brevity, but the points made are equally relevant to Bond Index funds and ETFs].
“Confronted with a challenge to distill the secret of sound investment into three words, we venture the motto, Margin of Safety.” – Benjamin Graham.
“It is not the strongest or the most intelligent who will survive, but those who can best manage change.” ― Leon C. Megginson (Business Professor 1991-2010). The price war between asset managers has been fierce in recent years but has been more aggressively fought in the passive arena- as this article noted late last year, Active fees have fallen by less than those of Passive funds, despite starting from a higher base. Like an eye-witness to a major catastrophe, the Active managers appear to be in a state of numbed incomprehension, unable to process what is happening to them. Meanwhile “feemageddon” as it has been dubbed, rolls on relentlessly; Passive funds have taken huge bites out of Active Manager’s assets, as investors wise up to the cost (as well as the returns) differentials.
“Buy not on optimism. Buy on arithmetic” – Benjamin Graham Analysts and fund managers rarely agree, but on one thing they are united; the UK stock market is cheap, at least in relative terms. Since the Brexit Referendum, the UK All Share Index has lagged the World (ex-UK) by over 6 percentage points per annum on an annual basis and now stands on a Dividend Yield of 4.22% (as of 17th May) and a Price Earning Ratio of 16.05x compared to 2.32% and 18.63x for the World ex-UK Index. There has been a flurry of articles proclaiming that the UK share market is cheap,, with a JP Morgan fund manager declaring that they have not been this cheap since World War One! The charts below show the damage wrought since the Brexit result.
“We have to work towards free trade because otherwise we will miss out on many opportunities for cooperation, and relations amongst countries will become much more difficult” – Lee Hsien Loong (Prime Minister of Singapore).
With the S&P 500 Index having just touched all-time highs and Donald Trump deciding that now is a good time to demand a cut in interest rates by 1% and to re-start QE, contrasting their timidity with that of the Chinese Central Bank, averring that the US economy would go up “like a rocket” if they followed his advice. This would appear to be akin to fighting a fire with gasoline, but that doesn’t mean the Fed won’t do it anyway, (though not this week it seems!)Outside of US markets, however, things are not quite so rosy, as indicated by the fact that the MSCI World Index ex-US Index is nearly 11% below its highs (reached in January 2018), and nearly 20% below its 2007 highs, indicating that, once again, the US is leading the charge higher.
