Year to date most of the world’s stock markets have given back a small percentage of the very strong returns generated in 2009. ’Double dip’ we hear you cry! ’Be calm’ is our response!
We believe that we are in the early stages of a bull market; we do not think we are about to suffer a double dip recession. The first phase of a bull market is never fun. Investors carry psychological war wounds from the preceding bear market and, accordingly, are typically nervous and insecure. There is clear evidence of this today as investors’ attention is focused solely on negative economic statistics. Media headlines do little to dispel such fears.
The initial stock market rebound in March 2009 was not sustainable in strength or duration, in part because it comprised a sharp upward re-rating of stocks that had been priced for bankruptcy and in part because expectations for economic recovery became too optimistic. The economies of the UK, Continental Europe and USA have fundamental problems which need to be addressed. We must allow these stock markets a period of digestion and respite as it would be unhealthy and unsustainable for them to continue their meteoric rises of the last nine months of 2009.
Today, a significant proportion of assets are sheltered in what investors perceive to be low risk investments such as cash and gilts yet they are not providing a real rate of return. Meanwhile, equities are yielding around 4% with potential capital upside and no one seems to be interested. We are not overly optimistic about returns for the next six months but on balance, we see inherent value in global equity markets.
Fear and pessimism aside, the recent falls and stagnation in equity prices has made the asset class an even more compelling investment opportunity. Our search for good returns takes us East whether investing in emerging Asia and India or in developed world listed businesses which operate in these regions. Asian countries are not saddled with high leverage and are enjoying strong growth in intra-regional trade. Economic growth rates are much higher than in the developed world and governments are encouraging consumer spending through fiscal policy and by facilitating movement and trade through the development of infrastructure. In India, consumption remains strong and there are many opportunities to participate in the infrastructure boom which is only in its infancy. In the developed world, we are investing in global brand names and global businesses which derive a significant proportion of their revenue from these faster growing developing countries. We equate these businesses to the ’old economy’ stocks of 2000 that were neglected in favour of the racier dot com companies. Valuations, in many cases, remain unchanged over the decade and do not reflect the fact that balance sheets are stronger, these businesses run lean operations and operate in growing markets. All that is needed is for their success to be recognised and rewarded with a share price re-rating.
We are fully aware that investor and business confidence remains fragile and so we are particularly careful to weigh up the risks and rewards when making our investment decisions. We are happy to hold some cash but, equally, we are looking for the opportunity to invest that cash into the equity markets to participate in the next upward surge that we believe will be forthcoming. Valuations are attractive, all we need is a little reassurance that the world is not coming to an end and we will be able to watch the next phase of the bull market kick into action. Phase two of a bull market is always a welcome evolution. We don’t believe we are quite there yet but we do believe that the worst is over.
