In the past, we have used the airplane analogy to describe our role as your investment manager. We, like a pilot, are responsible for safely flying you on your long haul investment journey. In our cockpit, we have numerous instruments and indicators that provide us with information to help us gauge the market conditions we are facing now and what may lie ahead. As recent history highlights we can experience periods of severe turbulence and it is then that we will ask you, our passengers, to return to your seats and fasten your belts until it subsides. But turbulent conditions don’t last forever, nor do bear markets.
It is in the nature of financial markets to always look forward and investors continually hunt for that elusive market low. There is no flight path, map nor directions available to guide us to this destination. To date this quest has been a frustrating one, the low we discovered in November last year proved to be a false dawn by the beginning of March as markets plunged to new depths. Since then markets have continued to show a recovery. So again the question is – have we seen the bottom of this current bear market?
As investors we have experienced both volatile and ranging markets in the past six months as the mood swings from pessimism to optimism regarding the length and depth of the global economic slowdown. The slowdown that began in the US has now spread across developed economies to the rest of the World. In a bear market we expect to see false dawns and there have been plenty. These markets favour the skills of the day trader rather than the longer term investor. The winning strategy has been to sell short the market after any significant rise. This was the case with the post Christmas rally which was beaten down by the barrage of short sellers in the New Year. The continuous scroll of bleak economic and corporate news has made this trade profitable perhaps until now – but this may be about to change. For despite any obvious improvement in the fundamentals those short sellers are being squeezed out of the market – has the bear trap been sprung?
To sustain a genuine rally from here and ignite the next bull market, the congregation of long term equity investors will need a restored faith in a future of economic growth and financial stability. Governments and central banks worldwide need to restore our trust and confidence in the financial markets. The recent meeting of G20 leaders in London took us another leg along the way to achieving these goals. For some commentators this gathering was merely a photo opportunity which was long on hot air and short on substance because the agreed financial packages and joint statements were negotiated by those who arrived in advance of our World leaders. But the real objective of the G20 meeting was to show the world a picture of global leaders working together to solve a global crisis. This is the most serious global slowdown seen since World War Two. Co-operation amongst World leaders and their central banks in the global reflation trade remains vital. The economic landscape of the World continues to change as the engine for growth moves from West to East. The extension of the original G7 to G20 supports this picture of global co-operation and unity. However, as no one size fits all, each country will chose their own combination of monetary and fiscal stimulus bespoke to their own economic needs. The danger is that this could lead us down the path of protectionism which could hinder the current policy of global co-operation. To date whilst there have a few minor incidents, the policy of open discussion currently being adopted has avoided any disastrous individual policy decisions.
It is the banking system in the West that has required most care and attention from governments and central banks. In the UK, the exercise to clean up the banks’ balance sheets has leaned heavily on the generosity of the Government in the absence of any other private capital being made available to them. It is the Government who hold the last creditable cheque book and have the ability to print money in an operation known as “Quantitative Easing”. There has been much talk here about the possibility of nationalisation which is the British taxpayers taking ownership of the banks. In our view, and we feel this was best summed up in a recent market review carried out by Scottish Widows Investment Partnership, “in the land of the free (market), nationalising banks, like the wearing of white socks and dress trousers, is to be avoided at all costs.” But without taking the nationalisation route the challenge this Government faces is a significant one: to put significant sums of cash into the banks without taking ownership, and whilst still protecting taxpayers interests. As yet they have not succeeded with this challenge.
So we are in the midst of economic recession and more importantly for equity investors we also remain in an earnings recession. However there are some early signs that things are beginning to stabilize in the economy. Much of the bad news is already discounted by markets with what is the biggest reflation trade in history now in play. And we must remember that there is a stage in any earnings cycle where prices can rise even though profits continue to fall. Current buyers would argue that we have reached this stage; we are in an environment of very low interest rates, much lower commodity prices and are experiencing a period of unprecedented monetary and fiscal stimulus. And it seems the market supports their view point having rallied week after week since early March. But it is the sustainability of that rally that is questioned, particularly by those who have maintained high cash weightings. The choice facing investors is a tough one: either be “long and wrong” or stay in cash and miss the market rally. To chase a rally too hard at this stage and get hit by a 20% fall would be extremely painful after the last six months.
We would caution investors not to chase these markets too hard until there are clear signs that the fundamentals have stabilised. Expectations are that the economy will begin to show signs of a mild recovery later in the year. The summer will hopefully bring better news, the housing market is stabilising, the rate of unemployment is slowing and credit markets are functioning closer to normality. The lack of transparency in the banks is still a major concern and we continue to monitor closely for signs of an improvement here. In our cockpit the instruments gauging economic fundamentals are still erratic whilst we appreciate that other indicators measuring confidence and conviction portray a different story. So although confidence and therefore share prices have risen recently just for now, Ladies and Gentlemen, stay in your seats until we turn off the seat belt signs.
John Husselbee
North
20th April 2009
It is in the nature of financial markets to always look forward and investors continually hunt for that elusive market low. There is no flight path, map nor directions available to guide us to this destination. To date this quest has been a frustrating one, the low we discovered in November last year proved to be a false dawn by the beginning of March as markets plunged to new depths. Since then markets have continued to show a recovery. So again the question is – have we seen the bottom of this current bear market?
As investors we have experienced both volatile and ranging markets in the past six months as the mood swings from pessimism to optimism regarding the length and depth of the global economic slowdown. The slowdown that began in the US has now spread across developed economies to the rest of the World. In a bear market we expect to see false dawns and there have been plenty. These markets favour the skills of the day trader rather than the longer term investor. The winning strategy has been to sell short the market after any significant rise. This was the case with the post Christmas rally which was beaten down by the barrage of short sellers in the New Year. The continuous scroll of bleak economic and corporate news has made this trade profitable perhaps until now – but this may be about to change. For despite any obvious improvement in the fundamentals those short sellers are being squeezed out of the market – has the bear trap been sprung?
To sustain a genuine rally from here and ignite the next bull market, the congregation of long term equity investors will need a restored faith in a future of economic growth and financial stability. Governments and central banks worldwide need to restore our trust and confidence in the financial markets. The recent meeting of G20 leaders in London took us another leg along the way to achieving these goals. For some commentators this gathering was merely a photo opportunity which was long on hot air and short on substance because the agreed financial packages and joint statements were negotiated by those who arrived in advance of our World leaders. But the real objective of the G20 meeting was to show the world a picture of global leaders working together to solve a global crisis. This is the most serious global slowdown seen since World War Two. Co-operation amongst World leaders and their central banks in the global reflation trade remains vital. The economic landscape of the World continues to change as the engine for growth moves from West to East. The extension of the original G7 to G20 supports this picture of global co-operation and unity. However, as no one size fits all, each country will chose their own combination of monetary and fiscal stimulus bespoke to their own economic needs. The danger is that this could lead us down the path of protectionism which could hinder the current policy of global co-operation. To date whilst there have a few minor incidents, the policy of open discussion currently being adopted has avoided any disastrous individual policy decisions.
It is the banking system in the West that has required most care and attention from governments and central banks. In the UK, the exercise to clean up the banks’ balance sheets has leaned heavily on the generosity of the Government in the absence of any other private capital being made available to them. It is the Government who hold the last creditable cheque book and have the ability to print money in an operation known as “Quantitative Easing”. There has been much talk here about the possibility of nationalisation which is the British taxpayers taking ownership of the banks. In our view, and we feel this was best summed up in a recent market review carried out by Scottish Widows Investment Partnership, “in the land of the free (market), nationalising banks, like the wearing of white socks and dress trousers, is to be avoided at all costs.” But without taking the nationalisation route the challenge this Government faces is a significant one: to put significant sums of cash into the banks without taking ownership, and whilst still protecting taxpayers interests. As yet they have not succeeded with this challenge.
So we are in the midst of economic recession and more importantly for equity investors we also remain in an earnings recession. However there are some early signs that things are beginning to stabilize in the economy. Much of the bad news is already discounted by markets with what is the biggest reflation trade in history now in play. And we must remember that there is a stage in any earnings cycle where prices can rise even though profits continue to fall. Current buyers would argue that we have reached this stage; we are in an environment of very low interest rates, much lower commodity prices and are experiencing a period of unprecedented monetary and fiscal stimulus. And it seems the market supports their view point having rallied week after week since early March. But it is the sustainability of that rally that is questioned, particularly by those who have maintained high cash weightings. The choice facing investors is a tough one: either be “long and wrong” or stay in cash and miss the market rally. To chase a rally too hard at this stage and get hit by a 20% fall would be extremely painful after the last six months.
We would caution investors not to chase these markets too hard until there are clear signs that the fundamentals have stabilised. Expectations are that the economy will begin to show signs of a mild recovery later in the year. The summer will hopefully bring better news, the housing market is stabilising, the rate of unemployment is slowing and credit markets are functioning closer to normality. The lack of transparency in the banks is still a major concern and we continue to monitor closely for signs of an improvement here. In our cockpit the instruments gauging economic fundamentals are still erratic whilst we appreciate that other indicators measuring confidence and conviction portray a different story. So although confidence and therefore share prices have risen recently just for now, Ladies and Gentlemen, stay in your seats until we turn off the seat belt signs.
John Husselbee
North
20th April 2009
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