Global market update
The “January barometer” or maxim is “As January goes, so goes the year.” If this saying extends to the prior month of December, then 2011 will be a strong up year, because global markets were very firm in the last month and quarter of 2010.
For a US dollar investor, equity investments both in the US and across most of the world performed very strongly. Part of this was clearly due to the depreciation in the dollar against other currencies.
Bill Miller of US based fund managers, Legg Mason Capital Management, in a report at the end of 2010 commented on what would bring the investing public back into equities and away from bonds.
He noted that while the investing world idolizes Warren Buffett, they almost invariably ignore his investing advice. In 1974 near the bottom of the market, Buffett noted how cheap stocks were. In 1999 near the top, he opined that stocks would see returns way below those experienced in the bull market up to that time. In October 2008 near the bottom, in an article titled “Buy American. I Am” in the New York Times he told people to buy American Stocks. In October 2010 he said “It is quite clear stocks are cheaper than bonds. I can’t imagine anybody having bonds in their portfolio when they can own equities.”
According to Miller, people poured money into bonds and sold equities. He then asks “So what will bring the public back into stocks?”
Answering his own question, he says, “The same thing that always does: higher prices.”
Locally many fund managers are also stating things like “Offshore equity is our asset class of choice”
They are not alone and a January 2011 report from Legg Mason, notes that many US based investment managers are becoming more bullish in their assessment of prospects for 2011. In the last few months, the bullish camp has gotten very crowded, which, in the short term at least, can be a negative indicator.
2011 is also a third year of the presidential election cycle and according to the report one has to go back to 1939 to find a pre-presidential year in which the S&P500 declined.
He notes that “People have been buying bonds, not because they have necessarily considered the risks and rewards of ownership, but because they have gone up so much over the past 30 years.”
Fair value for US bonds
According to BCA Research, a long standing independent research business, “The prevailing market consensus has swung quickly in favour of better economic growth.” They go on to say that a steady flow of capital has supported share prices and the year has got off to a good start.
Source: BCA Research
Liquidity drives prices and importantly the US Federal Reserve, as the main source of global liquidity, has a commitment to its existing stimulus plans. There is therefore a very low possibility of interest rate hikes in the US this year.
This in turn is positive for risk assets, which is exactly what the US Federal Reserve wants – i.e. to raise asset prices, increase confidence and stimulate spending and hiring.
BCA go on to say that equity prices only start to run into trouble when Treasury yields creep above fair value, which according to their models is currently 4,1%.
The yield on US bonds picked up in the last half of 2010 from 2,4% to around 3,4% - see chart below of the US 10 year Treasury yield. This is therefore still off fair value and investor should not be rushing to buy bonds – quite the opposite
US 10 year Treasury Yield
Possible impediments to a bullish world in 2011
Some possible risk factors that could strain a generally bullish outlook for global markets, would include the following:
In general then our longer term view remains one of taking advantage of the relatively attractive values of global equities and where possible and necessary, reducing exposure to asset classes such as bonds which remain unattractive.
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