Great Rotation revisited
There’s been a lot of debate about the idea of a “great rotation” from bonds to equities, and every Wall Street strategist has a view (consensus: the equity bit will happen soon, but bond yields won’t rise yet as central banks keep on buying).
Alain Bokobza at SocGen has come up with a lovely chart to back up their view that money should be flowing into equity mutual funds, as indeed it has started to do. Read more
The CMH (Cost Matters Hypothesis)
Active investment still has some active defenders, at least in the UK, to judge by the reaction to a recent Long View on the subject. And digging into the reasons for active funds’ persistent problems, it is easy to see why. Despite the claims of the Efficient Market Hypothesis (EMH) that it is impossible to beat the market other than by luck, it appears that an impressive number of managers do achieve the feat.
The problem is that they do not manage to beat the index by enough to be able to pay themselves and still pass on a decent performance to their clients. In other words, to quote Jack Bogle, the founder of Vanguard and the spiritual father of index investing, the case for passive investing rests on the CMH (Cost Matters Hypothesis), not the EMH. Read more
In his first term, US president Barack Obama oversaw the second-biggest rise in the stock market of any US president since the second world war. James Mackintosh, investment editor, says his second term hopes of economic recovery rest more on the housing market than equities.
Wall Street’s bullish bias, part II
My post on the inherent bias towards bullishness among Wall Street’s analyst community prompted an interesting response from Ian Harnett at Absolute Strategy Research.
He agrees in principle that sell-side analysts and strategists tend to be pro-cyclical, raising predictions as the market rises (his London research house is on the sell-side too, it’s worth noting).
But he argues that when analysts refuse to raise their forecasts in line with rising markets, that is a good sign for investors – and that this is exactly what’s happening now. When it happened in 2005-6, the market soared even as analysts became more cautious.
Source: Absolute Strategy Research
Why Wall Street is always bullish
It has long been known that Wall Street analysts working for investment banks (the sell side) are biased towards shares going up, from which they and their employers benefit.
This chart from Kevin Gardiner, head of European investment strategy at Barclays Wealth (part of the bank on the buy side, not the sell side) shows analysts tend to start each year optimistic, then become less optimistic as the year goes on. Each line shows how S&P 500 profit forecasts for a single year developed as time went by. Only in 1988, 2005 and 2006 did they end up more positive than they started, yet hope continually overcame reality.
Source: Barclays Wealth
There’s an intriguing explanation for the bias of sell-side strategists from Dhaval Joshi at BCA Research. The way for a strategist to prosper is to be right as frequently as possible – and he should know: he is a sell-side strategist himself. Assuming that the strategist can’t forecast the market with any accuracy, that means it is best to ignore the odd period of big losses and instead focus on the higher likelihood of rises.
It is quite reasonable to assume forecasts will not be accurate, partly because of their history (chart below) but mostly because if a strategist could accurately forecast the market, they would not need to work for a living. Read more
The View from Goldman
Goldman Sachs’ strategists are currently roaming Europe on their annual Global Strategy roadshow. As nobody can lightly ignore what Goldman is saying, the themes emerging from the London event were interesting.
Of particular concern are the prospects for corporate earnings; Japan; and the hope that 2013 will at last be the year for a “great rotation” out of bonds and into stocks.
On earnings, David Kostin, their US equity strategist, explains their view in the video below. In a nutshell, margins are high, but without a recession (which nobody expects) there is no need for a sharp reversion to the mean. Instead, forces such as shale gas will help profitability, but there will be little increase in margins as in many sectors they are already at historical highs. So margins stay at their plateau, and earnings rise gently thanks to the gentle recovery of the economy.
On Japan, bullishness is what might almost be called a “consensus contrarian” call. Many people are talking bullishly about Japan, despite its decades of under-performance. So many, indeed, that it is hard to call this call contrarian any more. Read more
Bears spotted, hiding in London
If you go down to the woods today, you won’t need a disguise: the bears are all at their annual picnic (OK, conference) in west London, led by uber-bear Albert Edwards of Société Générale.
He’s picked a good day to warn of looming disaster: yet another indicator suggests investor complacency is approaching danger levels thanks to the new year rally.
Short-term momentum indicators were flashing red in Europe last week, and even after falling back slightly remain very high. Read more
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.
The valuation gap between European and US shares has narrowed to levels only seen a few times in the past decade. Is this justified? James Mackintosh, investment editor, says this suggests investors see a safer Europe while America’s economy turns European. Read more
All cashed up and ready to go contrarian
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
| About this blog | Blog guide |
James Mackintosh is the Financial Times' Investment Editor, writing and presenting the daily Short View column and video. In 16 years at the FT his posts have included comment editor, motor industry editor and hedge funds correspondent, as well as spells in the Parliamentary lobby and Paris. He was the first reporter hired for FT.com, joining two weeks before it launched.
John Authers is the Financial Times' Senior Investment Columnist, writing the Saturday Long View and a regular Monday column. In a 22-year career at the FT, his previous posts have included global head of the Lex column, investment editor, US markets editor, Mexico City bureau chief and US banking correspondent. His latest book is The Fearful Rise of Markets. 
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