David Burns tries to figure out what is happening in the global investment markets.
I came across an article recently in one of my favourite weekly newspapers, entitled ‘Joy, pain and double dips’. In the article, the journalist, discussing the situation in the world economy, suggested that the current fear over a renewed recession in America was overblown, whilst commenting that so was the renewed optimism in the euro area. A familiar sentiment to many, including myself, and perhaps a simple confirmation that over the last year or so, paraphrasing Samuel Becket’s immortal words, everything has changed and yet nothing has changed.
Not a great thought on the eve of going off on my summer vacation, as I sit here looking at my screen and wondering what to do, if anything, with my humble savings. My ‘investment portfolio’ might have sounded a little grander, but at the end of the day, that is what they are: simple savings.
"Although the apocalypse seeks to have been avoided for the time being, I will still board my plane tomorrow worrying about a double-dip recession, the risk of deflation and the fact that most of the civilised world's economies are not simply experiencing temporary liquidity problems, but are in fact insolvent."
Going back to what has not happened: I think of the first quarter of last year when most, if not all, of the talk was about a repeat of the Great Depression. And yet, fast-forwarding to today, the world seems to be in far better shape than one would have guessed just over a year ago, and some of us by either default or design went into and then came out of the equity market with almost faultless timing. This said, and although the apocalypse seems to have been avoided for the time being, I will still board my plane tomorrow worrying about a double-dip recession, the risk of deflation and the fact that most of the civilised world’s economies are not simply experiencing temporary liquidity problems, but are in fact insolvent.
Like many, I am actually pretty confused about what is or is not going on. Only last week, I was asked to write something on the fixed income markets and, with my hand on my heart, I had to say I could not write anything, because I simply could not work out what was happening. So what has changed?
Nothing much has changed, in the 10-year window; yields on both gilts and Treasuries are at their lowest levels since the early spring of last year, as is the 30-year Treasury bond. Other players still bumping along the bottom in the first quarter 2009 include Bund yields, Japanese government bonds and volumes in the MSCI Emerging Markets index—an interesting bunch of indicators, but all still pretty much where they were just over a year and a half ago. The exceptions are, of course, the equity markets, mostly thanks to the fact that corporate earnings have been supportive, although they seem to be trading on thin volumes of late with resulting hiccups along the way. All in all, and despite my fears, it seems that it may be early days before the onset of the final collapse of the global financial system. So what have I been doing?
Having gone into and then exited the equity market more or less at the right times over the last three quarters of 2009, the struggle was then not to let myself go back into the market. It was a bit like having to drag myself away from the Crown & Anchor table during the Cup Match in Somerset back in July, having significantly more money than I had in my pocket when I walked into the gambling tent! For the record, there was some method in my investing pattern. I basically overweighted Asian equities, went long on our house BRIC (Brazil, Russia, India, China) fund and took a significant position in a global convertible bond fund that I felt offered some corporate bond exposure, with a free equity put thrown in. Not particularly nailbiting stuff, but I came away comfortably above water.
Since the last quarter of 2009, more or less, and until a few days ago, I have stayed mostly in short-duration fixed income and highyield, mixed in with some global bonds and emerging markets debt. I have been keeping the balance in cash and taking the odd position in US dollars against the euro. Nothing very exciting, and certainly not trying to time the market, but the returns have been quite good. So what have I done now?
The answer is nothing much. I am going to try and forget about the markets for a while, catch up on some interesting reading, and spend time with family and friends. That said, I will of course find it impossible to forget about the markets, but then again, I doubt very much will happen over the next few weeks—more of the same probably, with a little volatility and trading within a not too generous range. There may be shocks, but judging from market reaction over the last couple of years, we seem to have gotten pretty used to them. I do think it is time, however, to change the way we approach investing and how we invest.
I am a great fan of the emerging markets debt asset class, although I do think they should think of a different name to put on the tin given what is inside and what these types of funds tend to do. I also tend to think that the traditional manner of allocating assets might need tweaking. One does not have to be a market expert to figure out that, in the medium term, Asian markets will outperform their European counterparts and, given the change in global economic balance, the BRIC countries should be present in most portfolios.
So, as everything changes but nothing changes, I am departing for my holiday, leaving most of my funds in cash, keeping most of my bond positions very much as they were a year ago and making a small adjustment in favour of the Asian economies. My money is basically following most other people’s money, mainly because I want to preserve cash rather than harbour unreal expectations of fat returns from the markets.
David Burns is country head of Schroders Bermuda. He can be contacted at: firstname.lastname@example.org
Capital management, Schroders, asset management, reinsurance, Bermuda