Equity fundamentals look good, but investors should continue to exercise caution. Instead, apply good, sound investment advice before making fundamental decisions.
In recent weeks we have seen just how quickly markets can change for the better. Equities have had a resurgence, which has caused some surprises among investors and experts alike.
Traditionally September is the worst month of the year for stocks, with the vast majority of the September indices over the past 30 years showing declines. But following the recent announcement of Q3 in the US, markets have rallied but now seem to be wavering a little. So, is this the start of a bull run and are the markets staging a long-term recovery?
As always, the experts have several different views and their projections range widely. In many cases there are so many experts saying so many different things that none of them can be relied on. It is because of this conflicting range of views that many investors pay little attention and sometimes dismiss them.
Some of the indicators that experts use seem to be diverging from their traditional paths, as they have over recent years. For example, when equity markets advance gold tends to decline. Over the past six months both have increased in value. The FTSE 100 has grown nearly 4%, the Dow Jones Industrial Average just under 10% and the S&P 500 almost 15% in 2012. During the same period gold has advanced more than 11%.
Some of the factors that appear to be dictating where equity markets are heading include:
Upcoming US elections, with the country almost holding its breath until the result in November. Then the US markets will move again.
The European economic crisis, including Greece and the possible domino effect of a potential collapse. All is currently relatively quiet on this front.
China's growth slowdown, which is affecting the rest of the world economy. One important point to note here is that China's growth has slowed. It is not in decline; it is still growing at a rate all Western economies would envy.
There are further macroeconomic trends that can be observed in a historical context and also have an influence on our economic futures and drive market direction. A good example is the "stagflation" period of 1968 to 1981, during which economies reflated and there was a trend of growing global inflation. Do you recall the late '70s and early '80s? Inflation was as high as 16% with interest rates up to 17%. Markets were choppy with overall gains over the period of around 14% _ an annual compounded average just below 1% per year.
There are many conflicting views about quantitative easing, or printing money. During the stagflation era central banks used almost the same methods to get economies moving by stimulating inflation; only the labels were different.
Then we entered a period of great moderation, which took us from 1987 to 2007. During this time the high inflation generated earlier was brought under control and economic growth advanced relatively steadily. Markets progressed at very good annual rates above 9% compounded over the period.
Gold was not doing anything exciting during the early years of the stagflation period and then suddenly in 1978 it took off and tripled in price in the next three years. During the great moderation period, gold declined slightly in the first 15 years and then it tripled once again from 2002 to 2007.
We could continue with statistics and analysis but there is no real answer to the burning question of where the markets are going and how should you be allocating your investment assets.
There is a strong school of thought that things have become sufficiently settled with economies for a period of equity gains. I appreciate that I could be shot down in flames for saying this. The fact is there is no correct answer.
If you have investments that you are able to spread among the wide range of securities available in the market today, where should you be going with these? Perhaps in the nearer term there is a case for continuing to hold non-correlated assets as part of your portfolio. Equities also look to be significant for the near future. However, these would need to be value equities.
We are currently seeing price/earnings (P/E) ratios at very low levels for several good blue-chip companies around the world. In relatively good times a share in a company with a P/E less than 15 is good value. There are a number around now with P/E ratios in single digits. This makes them very good buys indeed.
However, in looking at such companies be careful to make sure liquidity is good because a shortage of cash flow will strangle any business. If dividends are being distributed, this is the first step to recognising that cash flow is likely positive. The levels of debt held on a corporate balance sheet are also important.
Research on individual companies can be tedious. The majority of sensible expats have their investments managed by a good professional, through funds in which exposure to individual companies is limited. This will level out the returns but also restrict the risk of exposure to any one corporation.
I am aware of many expats who have direct holdings in a specific British bank. During the recent rallies on the markets they saw the share price of this bank climbing and decided to sell their holding. Since then the price has continued to increase and some are regretting their recent sales as they could have made even higher profits by staying invested. But there is still great risk in being too concentrated in a single stock.
Others have been invested in financial funds that hold a wide range of different shares. While their returns may not have been as high as some single equities, there has been far less risk involved because it has been spread over several companies. Investors suffer far less stress and enjoy more steady returns. This creates a good argument for holding funds rather than individual equities.
How are your investments currently allocated and diversified? If you feel you could do with a free financial health check to discuss opportunities, contact a finance professional today.
Andrew Wood has been an expat in Asia for 33 years and is executive director of PFS International. His articles, which cover the complete A-Z of financial planning, are available through the PFS library to readers on request. Questions to the author can be directed to PFS International on 02-653-1971 or emailed to firstname.lastname@example.org.
About the author
- Writer: Andrew Wood