The Long Term Is Getting Shorter (2)
Skerritts View - March 2017
Last month we suggested that short termism was making it harder to invest for the longer term. Just to prove that one month is a long time in writing about the short term, short termism has taken a turn for the worse from January 2018 (which is, arguably, in the medium term) when the Mifid II directive comes into force. Unless we are reading it incorrectly, from January 2018 there will have to be quarterly communications to investors about their accounts. Only four weeks ago we were bemoaning the bi-annual statement as a catalyst for short term thinking over the annual statement that used to be the norm, when insurance companies seemed to run all the retail money, which just goes to show that we should be more grateful for the status quo.
Now, we’re not suggesting for a moment that investors should not be kept abreast of how their money is doing – far from it – but the vast majority of investors can have access to their accounts online nowadays and can see for themselves how they are performing on a daily basis or shorter, if they want to. By forcing more regular communication on a quarterly basis we run the risk of desensitising investors in much the same way the various risk warnings that are trotted out in those countless adverts on TV and on the radio have become totally meaningless in the way that they are presented. Worse, at a time that costs are being scrutinised and questioned, such legislation can surely only drive costs up further.
Above costs and annoyed investors though, more regular communications will encourage even more short termism than we are seeing now, as managers strive to deliver positive returns over shorter and shorter timescales. Risks will be taken that are not being taken now, with the inevitable consequences that over-zealous risk taking yields. Either that or managers will give up trying and simply resort to letting markets take their investors wherever markets choose. And in a very mature bull market this has disaster written all over it.
Maybe we’re over-reacting. Maybe we’re seeing problems where there are none. But maybe, this is another example of change being unnecessary and not actually benefitting anyone. Time will tell. At least it will in the long term.
We can think of at least four events coming up in Europe that have the potential to upset markets if results don’t turn out the way they are expected (as if anything like that could ever happen!).
First up is the Dutch General Election. Then we have the triggering of Article 50, followed by the ever-noisier French General Election. In June we see the rather less publicised, yet nonetheless still significant, deadline for Greece to repay a further 6 Billion or so Euro to the EU. For now, we are ignoring the possibility of Italian elections in the Autumn following the German elections at that time too.
We said last month that we thought that Europe this year was something of a red herring and that we were maintaining an overweight position in anticipation of the markets breathing a sigh of relief after each event and closing the discount at which Europe is trading relative to other main markets. This remains our core strategy but we thank BCA Research for setting out in a very clear way why, although each event may be low risk in itself, it doesn’t mean that the chances of at least one of them going wrong is also low. To the contrary, there is actually more chance of a surprise in at least one of these factors than there is of them all passing off without issue.
In explanation, “if the probability of an individual shock is, let’s say, 20% then the probability that the event goes smoothly is clearly 80%. Therefore, the probability that all four events go smoothly would be 0.8 to the power of 4, equal to 41% (assuming that all four events are independent and the outcome of one does not influence another). Which means that the probability of at least one shock would be a significant 59%.” [The Contrarian Case For Bonds: BCA Research February 16th 2017]
In other words, there is more than a 50% probability that at least one event in Europe before June this year will create a shock to markets.
Add this to the two charts below showing that complacency is at its peak in recent times and it makes sense to us to take an extremely cautious investment outlook just now, reining in those animal spirits that have propelled equity levels to successive highs ever since Donald Trump moved his belongings into the White House.
The likelihood of a March interest rate rise in the US has increased in recent days, which could be the first of three this year. Alan Greenspan coined the phrase “irrational exuberance” about markets when he was Fed Chair. We can’t help but think that there is no better phrase to describe where we are at the moment. If we were investing for the short term, we’d be worried. Luckily it’s not January 2018 yet and we don’t need to.
Sources: BCA Research - February 2017
These are our views, as always, and don’t constitute advice in any way.
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