Buy in May and Stay In Play
Skerritts View - May 2017
1.1 Used when admitting that something is so before making another, more important point.
1.2 Used to ask for or to give permission.
1.3 Expressing a wish or hope.
It occurred to us that our Prime Minister could not have been more appropriately named in leading the historic negotiations over Brexit in the coming couple of years. She will undoubtedly need to confirm that something is so, before making another more important point, having asked for, or given, permission to do so. She won’t be alone in wishing and hoping that, in the words of Bob Marley, “every little thing’s gonna be alright”.
From an investment perspective, the same phrase is trotted out each year at, well, the start of May which goes:
The graph below goes some way to showing that the saying has had merit historically. Perhaps though, this year, it should be more of a case of “Buy in May and stay in play”.
We’ve made a case all year for being overweight European equities as we saw the various elections as potential red herrings. The markets have responded strongly to the fading probability of a Le Pen victory in France and the next potential hurdle – the Greek debt repayment due in June – is looking increasingly likely to be resolved without a hint of crisis this time around.
North Korea could yet be the most dangerous aspect to the complacency that appears to have set in globally as we see virtually all markets testing their all-time highs, but maybe this is one of those rare years when the Summer months won’t deal a blow to portfolio values and we remain fairly fully invested across our various mandates.
There are a number of silly phrases that commentators come out with when a simple “I don’t know” would suffice. There are so many that it won’t be hard to include one each month, but the one that is oft heard at the moment is “the outlook is uncertain”. Please tell me when the outlook has ever been certain!
Complacency is a dangerous characteristic in investment management and it looks like the majority are displaying it by the bucket-load. Nowhere is this more evident than in some of the “passive equals best” opinions that are swirling around our industry with ever-greater conviction.
Don’t get me wrong, we’re not saying that “passive equals bad” – far from it – but there is a risk that their weaknesses are being overlooked. Too many people are almost evangelical over their passive versus active positions and criticism of trackers is viewed as heresy. Say a bad word about passives and you’re labelled an old fashioned practitioner who has somehow failed to “get it” when it comes to modern portfolio construction. Well, experience can count for something in this business.
It’s amazing how short some people’s memories are. It was only in 2008 that we found out what it felt like to be in a genuinely scary market crash. OK, so not everyone was around for the crashes of 1987 and 2000, but eight years isn’t too long ago and yet investors appear to have forgotten completely what losing 40% of your capital meant. Of course, you didn’t actually lose it if you hung on and didn’t panic, unless you were in one of those structured products that were constructed around the notion that stocks couldn’t fall that far, but there was a sense of shock and disbelief at just how low prices could go. Or, more to the point, indices.
Today, we seem to have forgotten all over again that a crash can exceed all expectation. Several professionals that we’ve spoken to recently speak glibly of expecting a correction sometime soon – of 5% or so! That’s not a correction. It’s normal. But this long bull run since 2009 has anaesthetised expectation to such a degree that the reality of seeing nearly half the value of your capital wiped out before your very eyes has been dismissed as fanciful doom-mongering.
But here’s the rub. The growth in passives – be they geographic, sector or “smart beta” factors – is a symptom of a long bull market where everything goes up. Investors in a passive fund are buying an assortment of stocks without any consideration being given to underlying valuations. It doesn’t matter to the passive investor about the price that they are paying for what they are buying, except ironically it is the low cost of the product that they are buying that tends to attract the more favourable comments. The fact that they may be paying relatively little for something that is stuffed to the brim with over-valued assets seems to get lost somewhere.
Another growing risk in this mature bull market is that some indices are so restrictive, the weight of money coming into them is making it impossible to find enough stock to satisfy demand. Apart from this clearly inflating prices artificially into bubble territory, it is causing some indexes to be expanded so that the money coming in does not actually buy what it thinks it is as other stocks are included in the index purely to provide liquidity. Liquidity and capacity sometimes get confused, but it is this capacity issue that will make the liquidity issue that much more difficult should the queue of buyers turn into a queue of sellers.
You don’t need the eyes of Nostradamus to foresee a major blow-up at some point in the ETF market. We buy ETFs. We like ETFs. We think that ETFs are a majorly beneficial tool to have in one’s investment arsenal, but as with anything that can go up in value, it can head the other way rapidly if a storm breaks, and it can not be overstated how important it is that you can escape in a timely and orderly fashion should you need to do so.
Sources BCA Research April 2017
These are our views, as always, and don’t constitute advice in any way.
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