10th November 2015
2015 is looking like another dreary year but Rowan Dartington Signature’s Guy Stephens believes investors should not lose sight of the longer-term attractions of equity investing…
This time last week we were hoping to be in a rather clearer position with regard to assessing the future state of our nation and others besides, and to a certain extent, we are.
The raft of data releases that were observed contained no negative shocks and if anything, the overall balance was robust and supportive of economic prosperity, if somewhat modest.
The tide has shifted once more towards an interest rate rise in the US before the year-end, following strong employment numbers and an overall unemployment rate of 5%.
This has historically been associated with full employment and so the reasons for not raising rates are gradually falling away.
The China factor also appears to be receding outside of the mining and oil sectors with the consumer feeling confident as shown by retail sales numbers.
That said, the trepidation of the Central Banks is understandable and there is clearly some agonising around the various committee tables.
The problem lies with culpability if the economy should subsequently slow down and any decision made has to be reversed.
The amount of debt in the economic system has not reduced since the economic crisis and therefore the elasticity of demand to a rate rise could well be much higher than ever experienced in the past as rates have never been this low before.
Fundamentally, rates should no longer be on an economic emergency footing and there is evidence all around that excesses are starting to build. Just look outside at the number of construction cranes and property development projects underway.
Look at the housing market in London. Look at the new car registrations funded by finance deals. It feels very robust but only in those sectors where confidence is high. Offsetting this is the state of the oil, steel and mining industries, which still serves to fill the newswires with negative stories, thereby undermining investor sentiment.
We believe the equity market is still the most attractive risk/reward asset class for the medium to long-term investment horizon. Yes, there are challenges as always, but it is the size and magnitude of these challenges that matters.
The UK equity market has been skittish all year and has moved on from one concern to the next, with almost a hypochondriac need to worry about the future, just as we move on from the latest concern.
The US equity market appears to have left the summer doldrums behind and is very content with looking through the Chinese concerns and advancing forward.
The lows were achieved on 24/25th August 2015 when the FTSE-100 hit 5,899 and the S&P 500 fell to 1,190.
Since then, the UK index is up 7.7% whilst the US index has put on 17%, as the latter doesn’t have the drag of the oil and mining sectors which make up 17% of the UK index.
Investors should not lose sight of the longer-term attractions of equity investing. If you believe in the capitalist system and the benefits this will bring to the population in terms of wealth and value creation, then at some point it will feel like a positive investing experience even though 2015 is looking like another dull year.
That said, investors in the FTSE 250 are up over 9% year-to-date compared to the FTSE-100 showing of just 0.04%. Not surprisingly this is pushing the passive trackers to the bottom of the performance tables as they cannot help being fully exposed to the energy sectors and have continued to buy them all the way down.
At some point this will correct, but there would appear to be no appetite for a belief in improved fundamentals on the horizon to suggest this is anything but a tuck away and wait strategy.
As with all hypochondriacs, the reality is usually considerably less serious than the symptoms may suggest. It just requires time and a little good fortune where the run of negatives are replaced by a run of positives and the clouds lift.
Movements of 2.5% intraday have been replaced with movements of 0.25% with little direction, which suggests a period of calm contemplation. Perhaps a year-end rally may happen after all but why this should happen is elusive right now.