Some debts are fun when you are acquiring them, but none are fun when you set about retiring them. – Ogden Nash This week we shall focus on a number of (partially) related stories in lieu of a major theme. The common denominator is debt – how companies, states and even countries deal with the issue will shape the economic landscape for years to come.…
Only when the tide goes out do you discover who’s been swimming naked.
In the wake of the Fed’s non-decision on Interest rates last week, the markets have remained highly volatile and there are now questions being raised about the Fed itself. As Vanguard’s Chief US economist put it, “we are concerned with the Fed’s acknowledgement of recent market volatility in its decision. The Fed runs the risk of being held captive to the markets as, paradoxically, much of that volatility is due to the anticipation and uncertainty around when the Fed will move”.
[The following is NOT a forecast – according to some bookies, Corbyn has only a 14% chance of being the next Prime Minister. What follows is an unlikely potential scenario which would have a high impact on markets – a so-called Black Swan event] There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don’t know. But there are also unknown unknowns. There are things we don’t know we don’t know. – Donald Rumsfeld Black Swan: An outlier event, with an extreme impact…
There is always an easy solution to every human problem — neat, plausible, and wrong. – H.L Mencken (writer, 1880-1956) Declines in markets over the past three months have, as usual, led to an inquest into what went “wrong”, conveniently ignoring the reality that losses go with the territory, and at around 10% is no more than a run of the mill correction. Some suspects have been hauled up in front of the court of public opinion: Hedge funds (a usual suspect if there was one), Factor investing in general (smart beta, alternative beta etc.), and risk parity in particular. Hedge funds can be (partly) absolved of this charge. Losses, whilst large in some cases, were not generalised, and they may well not have been the catalyst for the chaos, but merely caught up in it all.
It hasn’t been a great period for all things Emerging recently. Predictably, analysts have turned negative co-incidental with the market falls. EPS forecasts have collapsed as this chart shows. As this article points out, however, that is a bullish sign for investors. Warren Buffet is often quoted as saying, “Be fearful when others are greedy, and greedy when others are fearful”, and this may be one of those moments. Meanwhile, aggregate Developed Market Bond and Stock valuations are at their highest level of all time, according to Deutsche Bank.
You’re not really diversified if you don’t hate something in your portfolio at the moment. – A Wealth of Common Sense, Ben Carlson 1/9/2015 Would you want to buy this market? We think that it can make sense… Source: Bloomberg One of the most important tasks in Long Term Investment is that of maintaining one’s asset allocation. Once a risk tolerance level has been set, one invests in a portfolio of assets, but that Portfolio will “drift” over time as the investments will generate differing returns. If stocks outperform bonds, for example, an original 60/40 (e.g. EBI 60) could morph into EBI 75 or even higher, which may be above the clients risk tolerance. The Tech bubble and subsequent crash will have pushed the Portfolio weighting above (and then below!) the client’s true risk level…
[This post is intended to try to explain current market trends and what it means looking forward. As Yogi Berra said, “its tough to make predictions, especially about the future”, so we won’t try. But, we can try to understand what is causing this huge shift in investor sentiment, as it may help us withstand whatever lies ahead. The views expressed are my own.]
In investing, the value premium refers to the greater risk-adjusted return of value stocks over growth stocks. Eugene Fama and K. G. French first identified the premium in 1992, using a measure they called HML (high book-to-market ratio minus low book-to-market ratio) to measure equity returns based on valuation. “The value factor clearly works, but the explanations for why vary. Historically, value stocks have outperformed growth stocks. The evidence is persistent and pervasive, both around the globe and across asset classes. While there’s no debate about the premium, there are competing theories to explain its existence”. Notwithstanding the above quote there is definitely a debate to be had on the existence of the “Value Premium”, not least because it has been conspicuous by its diminishing presence in the recent past. The chart below shows the returns to value over the past 20 years. As of 28/2/15…
Are Small Caps a truer proxy for UK plc? The performance of UK Small Cap shares has outshone both the overall market and the widely quoted FTSE 100 Indices as the chart below shows. It is worth going over the make-up of the various Indices. The FTSE 350 Index is the sum of the FTSE 100 and the FTSE 250 Indices (in Market Cap terms) The FTSE All Share Index is the sum of the FTSE 350 Index and the FTSE Small Cap Index (in Market Cap terms) FTSE 100 Aggregate Market Cap £1.71 Trillion FTSE 250 Aggregate Market Cap £354 Billion FTSE 350 Aggregate Market Cap is thus £2.06 trillion FTSE Small Cap Aggregate Market Cap £77.05 billion. FTSE All Share Aggregate Market Cap is therefore £2.14 trillion.
