28th June 2013
Psigma’s chief investment officer Tom Becket has set out a list of concerns as “structural fear meets cyclical nerves”, but overall he believes markets are being overly pessimistic.
In a note issued this week, in his usual colourful style, Becket says that the first structural issue to overcome is the fact that the ceaseless volatility and latest falls will once again weigh upon confidence, which has been impaired since the financial panic of 2008. “Indeed, ever since I assumed the poisoned chalice that is the CIO position at Psigma investors have been subjected to crisis after crisis. Sharp falls and violent rallies are not the conditions to encourage investors to commit money to markets, regardless of the pressures of zero interest rates,” he writes.
Becket suggests that tapering is tantamount to monetary tightening but that the Chairman of the Federal Reserve would not be moving unless he thought the US economy could take the strain.
“The main headlines have been generated in the US, where talk of the end of Central Bank support has rattled markets, causing yields to spike and prices to fall. We have discussed this many times before, but in general we believe that such concerns are premature. Indeed, Chairman Bernanke of the Fed said last week that “If you draw the conclusion that our purchases will end in the middle of next year, then you have drawn the wrong conclusion, as our purchases are tied to what happens in the economy.
“If the concerns are not premature then the Fed must know that the economy can take the strain of a reduction in QE (and eventual end to the programme), which is tantamount to a monetary tightening. Bernanke must have as good an idea as anyone as to the US’s prospects for growth and is unlikely to rock the boat unnecessarily. Indeed, this week’s figures on durable goods orders, consumer confidence, housing and manufacturing all surpassed expectations. More of the same will help to reduce fears over the summer.”
Becket also suggests that what is being called the ‘Chinese Credit Crunch’ has come out of the blue but that the actions taken by the Chinese Government are sensible and eventually it may being a buying opportunity in emerging markets.
“The Chinese authorities’ attempts to send a warning shot to their financial system, thereby purging the excesses currently building, came from the blue. However, our central thesis is that their actions are sensible, overdue and will lead to a more balanced economy. We just hope they don’t lose control. EM stocks have performed appallingly over the last 3 months and impacted our performance. Looking forward, this has made some markets very cheap, such as China which is now trading on a sub 7xs P/E, and we will be looking for opportunities in the coming months. With issues surfacing in Brazil, Turkey, China and other EMs this may seem a foolish thing to be considering, but at some point it will provide a great time to increase exposure.”
Becket wryly suggests that Europe couldn’t stay out of the headlines for long as it would be jealous of the attention.
“The European crisis also awoke from its peaceful calm with a vengeance last week. On-going ructions between the ECB and the German Bundesbank were not bad enough, but then the Greek coalition’s in-fighting and a request for further aid from Cyprus served up an untimely reminder that Europe’s issues were delayed rather than dealt with.
“Peripheral Europe’s borrowing costs have spiked once again, with Spanish yields back up towards 5% on the 10 year bond. I am going to repeat my pleas from the summers of ’10, ’11 and ’12 vintage; “can we have some decisive and co-ordinated action on Europe”.
The note concludes:
“To be perfectly blunt, it is incredibly difficult to make short term predictions when markets are in a state of panic. However, we believe that we are suitably positioned for the challenges and opportunities ahead. It is also very challenging to make strategy changes when volatility is so high.
“We are starting to look to interesting opportunities to use up our cash allocations and are looking to buy back in to UK index-linked government bonds. This will use up some of the buffer we had built up over recent months and be a complementary next step to our recent purchase back in to Japan and a new Alternative, RWC Enhanced Income.
“Generally we believe that many asset markets are moving back to attractive entry levels. We have spoken to a number of the managers on our recommended list, including most of the EM, Asia and Fixed Interest managers we invest with, where most of the deepest market worries have come from. We will keep you updated as the issues detailed progress. Our final advice is that it only seems a few weeks ago that there was hardly a cloud in the sky for investors. After last week’s grey and cold week en France I can confirm the opposite is now true. It strikes us that markets have become overly-pessimistic and are choosing to focus only on what can go wrong. In such times markets are often oversold and capable of re-gaining lost ground. We believe that this will be the case from here, but calling the turning point is hard”.