18 March 2010
Alphen AM’s Shaun Le Roux has a take which isn’t a million miles away from our own advice to expect the unexpected;-
“2010 has commenced and the mood is significantly improved on this time last year. A few clients have remarked to us that 20I0 will almost certainly be better than 2009. They may be right as far as the general confidence of the man on the street is concerned but we see things very differently as far as the market is concerned. This time last year we were far more focused on the opportunities for handsome returns that the stock market was providing and were less concerned about the timing of the rally. When the rally came it was impressive and 2009 ended up being a fantastic year for stock pickers, ourselves included. So, when we look at the market today we are significantly less excited than we were a year ago. Sure, the global economy has stabilized and is recovering nicely, but the stock market has largely factored this in over the past few months.
Our sense is that 20I0 could end up being a much trickier year than most expect.
It is very apparent that there are highly divergent views on the outlook for global equities. Some highly respected fund managers are noticeably bearish. At the same time there is a camp that is becoming increasingly optimistic about the opportunity for equity returns over the year ahead, as always championed by the sell-side. Why the divergence in views?
There is no doubt that economic fundamentals the world over have improved in recent months. We are no longer worried about staving off a depression and keeping zombie banks alive. Instead, our attention is focused on just how strong and sustainable the recovery is going to be. This is where the difference of opinion lies.
After the rally of last year equities are no longer cheap. Strong gains from here over the next two years will require a surge in corporate profits, or a bubble. Some market participant see a healthy profit growth cycle developing, some don't.
The recession of the past three years has been a balance sheet recession as opposed to the usual income-related recession. A balance sheet recession starts with excessive debt and sustainable trend growth only resumes once debt levels have normalized. The bears argue that 2008-2009 just saw a shifting of debt from banks and consumers to the government and the experience of the Great Depression and Japan tells us that growth will be at best anemic until the original problem - excessive debt - is resolved.
Whichever way you look at it we are in unchartered waters here.
The recent recession was not normal. But, policy response has hardly been normal either. The level of intervention to stave off the financial crisis and stimulate the economy has been extraordinary not only by virtue of its size but also by its co-ordination in a globalized fashion.
So, if we are all honest we need to admit that we are grappling with several unknowns here.
The world abounds with risk. This year and the next will shed further light on several burning questions. Will sovereign nations be able to service the recently acquired mountains of debt? Has the Chinese growth miracle of the past year been a lesson in economic policy or another chapter in the Greenspan textbook on how to fuel credit bubbles? What do the Western banks still have lying on their balance sheets? How much will bond yields have to rise to entice investors into treasuries once quantitative easing starts to tail off?
Yet, with monetary policy as accommodative as it is at the moment, the opportunity cost of sitting in cash and earning next to nothing can be high. Global central banks seem single-mindedly focused on keeping the monetary taps open and will almost certainly prefer to err on the side of normalizing policy too late rather than too early. They are very mindful of the policy errors of the Great Depression and in Japan over the past two decades. This speaks to the environment for risky assets remaining favorable until the markets stare down the barrel of policy normalization, which is likely to be some way off.
So, we have these conflicting forces of easy money and a potentially fragile economic recovery. Whilst confidence is high, markets will feed off the former, but sentiment remains susceptible to reminders of just how fragile the recovery could be. As Roosevelt put it: ‘AII we have to fear is fear itself.’ ”
Thank Shaun good take.