Investor pessimism ignores Europe-wide bull run
Mike Jennings, chief investment officer and fund manager at Premier, believes the negativity surrounding equity markets has been completely overstated.
With the constant barrage of bad news in the financial press, investors could be forgiven for thinking that equities have had a miserable time. Thankfully this could not be further from the truth.
As I speak, the world’s largest stock market, the US, has provided more than a 20 per cent return over the past 12 months.
The German market has produced a staggering 32 per cent return over the same period, with France, Italy, Holland, Sweden and Switzerland all posting gains in excess of 20 per cent over the year – often the definition of a bull market.
Even despite the eurozone’s travails, the Eurostoxx index of top continental European stocks is also up over 28 per cent.
Unfortunately, those investors with a UK bias have lagged, with the FTSE All Share index up just 13 per cent over the same period. Compared with base rates, at 0.5 per cent, and 10-year gilts yielding only 1.75 per cent today, that is still a decent return.
Performance of indices over 1-yr
Source: FE Analytics
Although pleasing to report double-digit annual gains in the fund, the past 18 months have been an exceptionally difficult period for investors.
Trading volumes have collapsed and the focus has been on rhetoric from politicians and central bankers, particularly in Europe.
The European Central Bank president, Mr Draghi, has signalled his willingness to intervene in short-dated bond markets, the reason being to maintain high liquidity and enable the most indebted nations to continue to refinance themselves.
Meanwhile, the US Federal Reserve has likewise announced an extension of quantitative easing until the US employment situation improves substantially. It also stated the expectation of “exceptionally low” interest rates until mid-2015, all of which are likely to be helpful for financial asset prices.
On the other hand, we are in unchartered territory on many counts. Budget deficits are at peace-time highs in many nations, while bond yields and official short rates have recently set all-time lows.
In the UK’s case, this equates to a 318-year low, since the Bank of England’s inception in 1694. And while aggressive monetary easing by many countries does undoubtedly help conditions for equities in the short-term, the problems of over indebtedness, lack of growth and, in the eurozone, massive differences in national competitiveness, still have not been resolved and are likely to cause further hiccups for markets ahead.
So how do we invest in a period of conflicting signals such as today? Focusing on long-term returns provides a great anchor, enabling us to avoid speculation as to whether markets will rise or fall in any particular day or week. We therefore concentrate on companies rather than markets.
We look for a number of characteristics that appeal to us. For example, although many countries are burdened with excessive debt, many companies have the opposite problem.
Some companies have extremely strong balance sheets and, in many cases are generating strong annual cash flows, thereby further increasing their balance-sheet strength.
In a world of historically low interest rates, the higher-quality companies are strong enough to be able to retire expensive old debt and replace it with new cheap finance, thereby immediately improving returns.
Similarly, some companies are using their cash pile to buy back their own stock, replacing low-yielding cash with higher-return equity – again immediately adding to shareholder value.
Global equities remain attractively valued relative to their history in our view, and extremely cheap relative to sovereign bond markets, although this is partly due to bond markets being artificially inflated.
We are far from out of the woods, however, on the resolution of eurozone issues and global growth generally, so periods of both euphoria and despair are both likely ahead. We believe that a rigorous process continues to offer investors attractive opportunities for the long term.
Mike Jennings is chief investment officer at Premier. The views expressed here are his own.