Where are we going ? Nobody Knows……

Pain and turmoil exists out there yet again for investors around the world. For once however it is a different kind of pain. you are more used to stories of markets in carnage as they sell off over the last four years since the credit crunch.

Global markets are currently posting all time new highs across the globe. All the major economies around the world have had severe rallies of late and most are breaking records every day. Should be good right? 

What if you have missed the boat? 

We are in a bull market, in bull markets stocks have a seemingly never ending capacity to go up, and usually that envokes good feelings across the investing community. Also unlike the previous few years when markets have rallied off their lows, investors have always had a target in mind, something to aim for as their was a price history higher than before, now there is nothing but fresh air up ahead so it is impossible to say with any clarity whatsoever where this rally could end, (anyone who says they can is just lying, its luck if they catch the top)

However this rally has been created by a cocktail of improving economic data but also unprecedented stimulus efforts from central bankers around the world. A cocktail that alot of investors find distasteful and worry that it will cause even more widespread disaster. These guys have missed the boat and currently living on a deserted island with not a friend in the world. 

In the world of investment management benchmarking is everything. Sadly so. Instead of paying investment managers to perform their duty and make what they deem to be sound financial decisions to make a return, they are benchmarked against not only their peers but also the relevant global indices. This is not a total generalisation as a lot of investment managers try to have an “unconstrained” approach where they do not benchmark versus these metrics but that all well and good if you can convince the investors of that but often you cant and investment managers need to be equal to their peers +/- a few standard deviations or else they lose there Asset under management AUM.

I dont envy those managers right now, they have a horrible decision, those that are not fully invested have to decide to jump in now and go with it or wait, all the while the market rallies. At these prices jumping in here can feel like suicide, as just as you are in the rug can be pulled, makes it even worse when you dont 100% believe that what is going on around the world makes sense or is hugely dangerous, and on the other hand “performance anxiety” sets in with each tic it takes higher. Really horrible situation and can feel worse than when markets are selling off as at least you know where they can stop selling off….zero.

It is like an experiment, central banks have pumped their respective economies with cheap money in an effort to stimulate growth. To date, we are seeing patchy growth and its very unevenly dispersed around the globe. China for example is still thought to be growing at a rate of somewhere between 7-8% a year, yet there are big concerns about their property market over there. USA is growing circa 2-3% a year now after a terrible few years and much of the rally in equities has been led by both the DOW and the S&P500. Europe and the UK however is still in the doldrums and locked in a political nightmare in Europe and a state that is still over burdened by banking debts and a slower economy due to the pressure on financial services. Japan has over the last few months made some huge moves in an attempt to arrest their sluggish economy by promising to double their money base over the next two years in order to stimulate close to 2% inflation which they feel will help them grow their way out of debt problems.

The extent to which central bankers have stepped in to try and prop up markets is like i say unprecedented. In times of economic strife governments tend to expand their balance sheets in order to take the stress off private enterprises balance sheets. Most of the G10 nations have some serious balance sheets right now consisting of bank loans, non-performing loans, government bonds, equities and FX reserves.

So if all this stimulus was meant to provide growth it has at least in theory worked or at least arrested the decline of it. So we are in a situation where companies around the world balance sheets are fairly robust in the sense that their debt leverage ratios (which was what caused the problem in the first place) would be a lot lower than the previous 10-15 years. However we have gone full circle almost companies are hoarding cash on their balance sheet owing to some serious painful lessons and memories from the credit crunch where financing was near impossible to locate and threatened the existence of their company. Coupled also with a banking sector that is now accused of not lending enough money to  the economy but also chastised for risky lending habits and you are not seeing much cash going onto the streets in the terms of capex, hiring or investment in new projects.

Where you are seeing it go is capital markets around the world. Anything with a yield or income is being grabbed at the moment and they usually take the shape of a couple of things. Government bonds as they provide income and relative safety on getting your capital back intact, the risk is that inflation ravages your return as currently the yield on most government bonds worth their salt are extremely low in historic terms. In Germany you will only receive a 1.3% return on a ten yr bond….inflation in the EU is currently tracking a little higher so your already negative.

Equities also receiving a bid but mainly in the shape of high quality dividend paying names that make up the bulk of the large exchanges around the world. Here you have the potential for capital appreciation and income that could well be above inflation and the option on the economy really improving.

I cant tell you when this bull market is going to end, no-one can, but for now its a horrible place to be for both the invested and the un-invested. Both feel it could turn at any moment in either direction and both have to be involved.


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