Capital markets

James Mackintosh

Former US Treasury Secretary Larry Summers warned of the dangers in the eurozone in his latest op-ed for the FT, and it is hard to disagree. But part of what he said bothered me:

A worrisome indicator in much of Europe is the tendency of stock and bond prices to move together. In healthy countries, when sentiment improves stock prices rise and bond prices fall, as risk premiums decline and interest rates rise. In unhealthy economies, as in much of Europe today, bonds are seen as risk assets, so they move just like stocks in response to changes in sentiment. Read more

James Mackintosh

To answer the question of who owns corporate America, we turn naturally enough to Goldman Sachs. In spite of all the “vampire squid” hype, the answer isn’t GS: but it does have an excellent summary of how ownership has changed (click on the chart for a bigger version).

Ownership of corporate America Read more

The European Central Bank – like the Bank of England – has decided against an immediate further loosening of monetary policy, but Mario Draghi, president, says some ECB policymakers favour cutting interest rates. Ralph Atkins, the FT’s capital markets editor, argues that with small businesses in the eurozone’s south facing a severe credit crunch and the stronger euro hitting eurozone exports, further action from the ECB may soon prove inevitable.

John Authers

Today sees the publication of Credit Suisse’s annual Global Investment Returns Yearbook, a mammoth piece of research into global long-run returns overseen by the London Business School academics Elroy Dimson, Paul Marsh and Mike Staunton. It is an invaluable resource, and this blog is likely to mine its contents for some days to come.

Revisions for this year help ram home one quick and spectacular lesson from history. Baron Nathan Rothschild is widely believed (wrongly, according to historian Niall Ferguson) to have said that you should “buy when there’s blood in the streets”.

Much of the time this advice works. Buying into Japan or Germany after the second world war would have worked out extremely well, and the greatest buying opportunities almost by definition come when it seems almost mad to buy.

But the aphorism is not infallible. This year, the academics tried to address their concern that their global stock market index suffered from “survivorship bias”. So they have recalculated them including three new countries that were not previously covered in their attempts to calculated the global equity risk premium: China, Russia and Austria. Adding these nations hugely changes the perception of long-term risk.

Let’s start in Russia. Any bold contrarians who decided in the late 19th century to bet on Tsarist Russia to outperform the US for the long-term, and held on even during the great political unrest of the attempted revolution of 1905, would for a long time have looked very clever.

The chart compares the St Petersburg stock exchange’s composite index performance with that of New York. After 1917, of course, the value of any equity investment in Russia was wiped out. This might appear to be an exceptional example. But it is not. China also had a revolution that led to the closing down of its stock market (and of capitalism for a while), and that happened within living memory. On the eve of the second world war, China’s returns looked very healthy. With the arrival of Mao, shares went to zero (and international investors have had a rough ride even since Chinese stock markets reopened).

Using the MSCI China index, covering stocks available to international investors, those who bought in 1993 have actually lost money. But Chinese stock markets have been recovering recently. And, deliciously for those who like historical ironies, the Shanghai Composite, the main domestic index, bottomed last year at 1949, the year of the revolution. Read more

Small caps in the US have hit their fifth new high of the year and UK smaller companies soared past their previous peak a month ago – both climbing 172 per cent since 2009. But James Mackintosh, investment editor, warns that if the current rally peters out small caps look particularly exposed.

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More than half European companies have dividend yields above corporate bond yields for the first time, while mutual fund sales saw their biggest weekly inflow into equities since the US stock market peaked in 2007. James Mackintosh, investment editor, analyses whether this is the long-awaited rotation from bonds back into stocks – and how to compare them.

James Mackintosh

Contrarians are usually a grumpy lot, constantly being ridiculed for making mad investments, only to have those that work out dismissed as pure luck.

2012 gave plenty of examples, with pretty much any mainstream equities the clearest (almost no one wanted them in January, everyone does now). For the more adventurous contrarian, Greek bonds bought at the start of the year and held through the default have returned 100 per cent, including coupons, while Portuguese bonds are up 79 per cent on the same basis. Read more

Investors are starting to worry that the bond market bubble is looking fragile. Investment editor James Mackintosh explains why this matters a lot.

Italian shares fell and bond yields rose as investors reacted badly to losing Mario Monti. Investment editor James Mackintosh says this looks like a classic market over-reaction. But there are reasons to worry that worse might be ahead for the country.

James Mackintosh

An investor given perfect foresight of how the world’s economy’s would perform after the credit crunch began five years ago today would still struggle to predict some of the most important market action.

Today’s Short View video explores some of the surprises of the last half-decade. The biggest surprise of the next five years would be if we ended up without a Japanese-style lost decade – and the result would be disastrous for bondholders positioned for ongoing economic gloom.

The newspaper version of Short View discusses the shifting patterns created by the changed bond/equity correlations and the hunt for yield.

Here are charts showing the world’s asset returns over the past five, fearful years: Read more