Cold start to 2009
DESPITE THE PREVAILING gloom this year is increasingly unlikely to be a poor one for equity markets. That’s the view of Investec strategist Max King. “Among the investment community the sense of crisis last autumn has given way to relentless gloom,” King says. He points to the “January barometer” as an indicator the bank uses to predict equity markets.
Investec’s barometer shows what happens in January is indicative of what to expect for the rest of the year. Says King: “If it’s valid this year investors would appear to be in for another poor year.”
Equity markets worldwide have swiftly unravelled since October 2008, which has seen enormous value destroyed and punters are worried about stepping back into the market despite the confidence displayed by investors like Warren Buffett who have been buying assets despite market turmoil.
King says a rapid succession of fiscal, monetary and financial packages is leading to increasing cynicism. “They aren’t working, they can’t work or they have political rather than economic objectives. Those who acknowledge market upside see it as only a bear market rally. The prevailing view on the outlook for economies and corporate earnings is catastrophically bearish, expecting depression rather than recession and permanent rather than temporary falls in profits.”
Says King: “The risk of new lows will remain until there’s evidence of economic green shoots in the US and of a reduction in the downward momentum of earnings. What we can say with increasing certainty is that such a setback should represent a once-in-ageneration buying opportunity.”
Supporting King’s view is research from the annual Barclays Equity Gilt Study, written by the highly regarded Tim Bond.
Investec strategist King says Bond’s research points out equity returns over the past decade have been among the worst on record. In the US market it was the fourthworst decade in the past 83 years – returning only -0,3% annualised – and only the decades ending in 1937, 1938 and 1939 were worse.
By the late Nineties the Barclays model, based on long-term metrics, was projecting negative returns for US equities over the next 10 years for the first time since the model’s inception in 1935 – exactly as has happened. Over the next 10 years the model projects a return of 12%/year, enough to make a portfolio more than treble in value.
However, investors have heard similar comments from a number of asset managers and will be taking such upbeat comments with a pinch of salt as they continue to watch their portfolios decline.