1st Quarter 2009
By Yvonne Staples
"In the business world, the rearview mirror is always clearer than the windshield." - Warren Buffett
At the end of 2008 we were hopeful that 2009 would bring about a less volatile year and more stability in the markets. However, it was not to be and although the markets began the year well they were soon to breach the lows seen in November 2008 and bottoming on March 9th, from where the markets quickly rallied by 20% bringing hope that this would see the start of a new bull market.
However, to put some perspective on the current economic recession, we must look at the US recessions since 1900, of which the five longest recessions all began before 1930 and averaged 14 months. We would like to think that the worse is over, however with most major equity markets still down 10% year to date we remain unconvinced. However the market trend has tended to trough four months ahead of this average and as we are entering our 16th month of recession and if consensus growth expectations are correct, the US will pull out of this tailspin in the third quarter of this year and more importantly would also place this as the likely turning point for equity markets now.
Despite seeing interest rates being reduced to all time lows in the UK to 0.50% by the Monetary Policy Committee, the lowest level since the Bank of England was established 315 years ago and the reduction in VAT last year, which had an immediate effect, these measures have not been sufficient and it will take some time for them to have any real impact on the high street.
Therefore the Bank of England have now turned its attention to Quantative Easing, by going ahead with the creation of a £75 billion reserve in order to purchase longer-dated gilts on the open markets. This may take some time to have an impact on the open market but the major consideration is that the government remains committed to providing the necessary stimulus for an economic recovery.
Recently in the UK last week the government saw the first failure of a conventional bond auction since 1995 with demand for £1.75bn of 40 year bonds falling short, coupled with the buy back of the £75bn of gilts and corporate bonds, will only lead to the Pound being devalued further and in the US a similar course of action may eventually lead to rampant inflation.
Although the ECB also cut their interest rates to 1.25%, this shows that they have still not grasped the real issues facing their economy as we expected at least a 0.5% cut and for them to embrace Quantative Easing like the UK and the US.
Gold still tends to act as a safe haven and would normally be a prime beneficiary of any inflationary crisis and although it has little intrinsic value, with the current global currency devaluation it could really start to shine.
Turning to oil and placing the credit crunch into a more recent context we saw the S&P 500 fall 56% from the peak, making the current equity sell-off the largest adjustment to a recession seen since the Great Depression. Prior to this the oil shocks of 1973/4 showed a market correction of 48% over 20 months, showing that is it clear that equity markets are pricing a very severe economic slowdown indeed. However, the differences since the 1970’s are noticeable, in the 1970’s the banks bailed out governments and now it is governments bailing out the banks.
The oil shocks were met by price and wage controls in the UK, the 3 day week and uncollected rubbish and we were literally in a mess and needed outside help, which is nowhere near where we are today. The credit crunch may depress growth until later in the year but equity markets have priced for more.
Most investment houses continue to believe that confidence will soon return to markets and that the global authorities remain committed to deliver whatever fiscal and monetary stimulus is required to bring about recovery, however, they still have very different ideas on the timing of such a recovery. They believe that the Quantative Easing will further stimulate demand and inflation which means we must be aware of the currency risks which will inevitably follow.
We have seen a re-positioning of portfolios ahead of this into gold and oil directly as a result, together with a stronger China, where they are planning a fiscal package of huge proportions, which whilst largely domestic is almost certain to have commodity related repercussions as China consumes 30% of the world’s copper.
Whilst some investment houses are reluctant to make an early move into the market it is worth remembering that since 1900, 25% of the first year’s returns have been made in the first 10 days of recovery and 50% of the first five year’s returns are made within two months! Markets are renowned to adjust quickly following a recession and the case for recovery is compelling.
We have also seen a re-positioning of portfolios into equities and some made the move a little too early, when they saw the first “green shoots” of recovery and consequently paid the price when markets hit their lows in March and others benefited by “holding firm” and relying on their belief that markets were set for a recovery.
Most managers remain cautious, although are starting to prefer the balanced model, if handled with caution. We have seen some very good active managers taking very good decisions, both on equities and bonds and making a 6% return for the 1st quarter of the year. All of them remain favourable on the US and UK, Japan, Asian and Emerging markets, however Europe has fallen out of favour for the present time.
We believe that with weaker exchange rates (we may see the dollar back to $1.60/£) we will see commodities in general revalue, coupled with a fall in long dated yield prices which will make the gilts cheaper, indicates we are definitely seeing a bottoming process, although still volatile, and that once completed will most likely be followed by a rally however, the timing of these moves remains difficult.
The latter half of 2009 could definitely see a turning point for markets ahead; if only we had a windshield to the future we could be sure!