Pegasus' View on Markets 2009
By Yvonne Staples
“I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years. “ - Warren Buffett
Warren Buffett’s quotes are often more true than most of us like to think and if we look back on 2009 we can see that we should always be buying for the longer term and not looking for market volatility to be our re-actor to our investment choices.
In January 2009 we were all very unsettled after a roller coaster ride through 2008, and until early March we still doubted those who were advocates of a recovery and a more stable market, into believing that there was better to come. From March almost right through to today the macro data kept improving while prices of risk assets kept on rising with what appeared to be an unstoppable momentum; however there is almost certainly a feeling that equities are over bought and that a correction would seem likely in the near future.
We still believe that there are further gains to risk assets to be made whilst policy remains accommodating, however this is likely to be followed by a market set-back when policy makers begin to warm up to exit strategies. Of course, we would expect this to be a gradual affair and early exits are far riskier than those who wait.
Throughout the world we have seen massive financial stimulus by governments including the UK, US and China to name a few, and those areas, which were provided with the greatest assistance have experienced the greatest gains. Growth is back in 2009 and with a vengeance, with the trend clearly being upward and with analysts revising up earnings estimates accordingly.
The main concern moving forward into 2010 is “Recovery” and the questions on everyone’s lips being, “if it is underway, what are its likely durability, expected scale and duration and what effect each of these will have on companies and markets.” Whilst we believe that a recovery has begun it is the other issues that are so hard to answer and much less visible. The future recovery is likely to be conditional on a durable economic recovery and as mentioned earlier can the momentum we have seen through 2009 continue once the policy exit proposals commence? Whilst we have seen encouraging signs of retail sales and consumer spending a key indicator of durability is likely to be employment growth.
Fortunately we have already seen sustainability in this area and are likely to see further compelling evidence for a flexible labour market recovery from the UK. However, as visibility is low on these issues we believe that policy makers will err on the side of caution for growth than on inflation and as a result as quantitative easing takes place this will mean a massive prospective bond issuance and a period of accelerated wage growth and debt deflation and to higher inflation.
Higher inflation will not favour bond yields and in particular fixed income and long-dated government bonds will probably be the worst performing asset class moving forward. Clients within these asset classes may be well advised to review their holdings, unless they are tied in to a specific income requirement, with a view to ensuring they are well diversified.
On reviewing the main investment houses that we utilise we have seen some making active changes to their portfolio’s throughout the year, taking advantage of the growth in the market, but still being wary of corrections and others believing that they are well diversified anyway and will continue as they are without making changes. Our philosophy is to ensure that you are well diversified and this can not only mean asset classes but investment houses too.
Moving forward we see most investment house keeping an equity content of around 40 – 50% for at least the next 3 – 6 months whilst interest rates remain stable, with some exposure to gold and commodities through Exchange Traded Funds and thereafter to see some movement when interest rates start to rise and we see higher bond yields but ultimately fixed income losses with it. The approach Pegasus prefers is that of an Active Asset Allocation Manager. Rather than being passive and adhering to a longer term allocation strategy this manager will actively move money between the various asset classes based upon their future view of market conditions to generate returns for their clients.
Finally, a short note on currencies where we believe that now that we have seen the details of the pre-budget changes, we will see a weakening of the pound and a strengthening of the USDollar. Any investor that is currently holding investments in pounds but have an underlying need for US Dollars would be well advised to make a currency switch in the near future.
Earlier in the year we were looking for a rally which we certainly experience, however recently with the news that in Dubai quasi-government organisations were defaulting on billion of Dollars of debt we can never be complacent and as Warren Buffett so profoundly said we should look to invest for the longer term and not worry too much about the short term.