Please imagine that you are a fund manager deeply sceptical about the likely survival of the eurozone.
One who is also seeing a sharp slowing of growth in China, an upcoming fiscal cliff in the US, and the UK economy undermined by political sclerosis and crippling banking regulation. One who believes that quantitative easing has an evens chance of failing.
Imagine that, for reasons with which you profoundly disagree, equity markets have been rising for three-and-a-half years and your well reasoned pessimism is causing your funds to perform poorly relative to others who have failed to grasp the severity of the situation and who, in your view, are taking reckless risks with investors’ money.
Do you now capitulate to inexorably rising equities or do you obdurately stick to what you “know” is the intellectual high ground and which will prove to be justified in the end?
Welcome to the September 2012 dilemma.
The gathering strength of the bull market, together with rising volumes, is showing that fund managers are at long last shifting into equities again.
If you are late to the party and need to play catch up there is little point in buying the same stocks that everyone else already owns and which have led equities upwards for years.
What you have to do instead is to buy ‘beta’, stocks that typically rise (and fall) more than the market average.
Thus despite all other logic telling everyone on planet Earth that this is the craziest thing to do it looks to me like we are in for a run. The European Central Bank has effectively underwritten all the European banks’ holdings in European sovereign bonds. Last week the Federal Reserve moved the last load of worthless property loans onto its balance sheet. As if by magic the European and American banking systems have been recapitalised via the back door.
Markets rarely lie. What we are seeing is a well established and broadly-based equity bull market disguised by the poor performance of a small number of the very largest companies.
My view is that the world economy has passed the worst and growth in 2013 will be nicely better.
* Jim Wood-Smith is head of investment strategy at Investec Wealth & Investment
