FTSE 100 since the start of the credit crunch
But a short sharp upward move is a short sharp move and not much else, and easily reversible when psychology is fragile as it still is now.
We think it makes sense to think about the equity market in three separate yet overlapping timeframes. The short term is the part that concerns traders and other similarly active market participants. As the maxim goes, the long term is made up of a long series of short terms. Moves such as the recent one which kicked off around March 17th, may – or may not – have particular significance, either as a sign of what is to come in the next few quarters, or in the greater scheme of things when viewed over a 3-5 year horizon.
For the private investor, the key challenge is how to make the leap, so to speak, from the short term to the long term in the ‘bit’ in-between. It’s that tricky intermediate area that is arguably the hardest.
If you accept that the vast majority of market wealth is made from staying the course with long term investment positions, as opposed to darting in and out of hot funds or trendy stocks, then it is quite clearly the long term that you are interested in.
Yet it also makes sense to try to understand where we are in the ceaseless ebb and flow of investment sentiment, i.e. looking at the intermediate timeframe, sometimes referred to as the tactical timeframe.
If you really think tactical allocation has little or no value, do the sums yourself, and compute the annual returns on a starting point of say, 5,000 on the FTSE, versus today’s 6,200, rising to a plausible level of 10,000 within 5 years. Entry points & price do matter, and there is a clear linkage between price and time.
Fine to admit one is no good at timing, but this is not the same as saying that timing, even over the long haul, does not matter. This is where we can make use, selectivley, never slavishly, of chart trend analysis, to help us in evaluating major market and sector trends, price levels and ultimately overall timing.
Turning to the $94,000 question – allowing for recent dollar devaluation – of what to do in late April 2008. As regular readers might recall, in a mid-February note entitled Follow the Sage, we suggested that the extreme gloom prevailing then would not last ad infinitum, and that if Warren Buffett was suddenly very busy evaluating bargains, then perhaps it was time for mere mortals to think about taking a contrarian view.
Markets have duly bounced, yet we still believe that we are in a significantly tougher period for equity returns. Hence it continues to make sense to hold high levels of cash and other safe-haven type investments, whilst being alert to bargain prices in top names, be they funds or shares. There is no bell rung to signal the bottom of a market. On the other hand, the long-term medals are not handed out for a nimble, quick 10% gain where one has astutely called a short term trough in the market. Overall, time is probably still on our side, to watch and wait, and buy selectively with one’s cash hoard.
The world is too volatile a place in the early part of 21st century for the traditional buy and hold, ‘shares are best’ approach. Nor, for many investors, do we think it makes sense for many investors to allocate funds mechanically to an arbitrary and lengthy list of consensus asset classes, in the name of diversification.
As a graphic recent example reveals, no one knows how long the recent ‘late to the table’ converts to property funds will have to wait to see a decent return on those investments which were made on the crest of a seemingly unstoppable bull market in anything with ‘property’ in its name.
Property funds over one year
| Threadneedle UK Prop Tr | 883 |
| L&G UK Property Tr | 844 |
| M&G Property Portfolio Tr | 816 |
| SWIP Property Tr | 784 |
| Norwich Property Tr | 744 |
| Total return on £1,000 invested, offer to bid, one year ending 06/05/2008, source: Financial Express Analytics | |
Hence to commodity bulls, perhaps the message is ‘don’t press your luck too far’. Ask the former technology, bank & property ultra-bulls, if you need further insight into how markets and sectors go up, and up, and up…until they stop doing so. Trends work until they don’t, and it is too easy to get sucked into an overly mature trend. We strongly favour seeking value in the market, as opposed to chasing trends, for the bulk of one’s assets.
To sum up, the market has made a nice recovery since those surreal days of January and February, but we still feel comfortable keeping relatively high cash weightings, partly because we believe there will be plenty more turbulence as we go through 2008 and into 2009. There are fund and share bargains to be found, but they have to compete on merit with the sanctuary of cash and other safe-havens. It’s been a mere six weeks since the dramatic bail-out of Bear Stearns that marked perhaps the nadir of the credit crunch. The notion of a crunch lasting to 2009 or 2010 seems unduly pessimistic. Yet, markets typically need more than one cathartic event before the balance of risk to reward returns to favour the investor. We may be closer in late April to this point, but in our view we are not quite there yet.
Dane Halling, Director, Investment Research, at Arcturus Investments. The opinions expressed are his own and do not necessarily reflect those of his company. No recommendations are implied by publication of this text.
5 May 2008