Make most of the market sweet spot
Sep 23 2009 by Andrew Miller, The Journal
ALL major equity markets except Japan continued to make progress last week, with many indices once again touching new highs for the year.
Indeed, the pace of recovery has been staggering: in equity markets, the fall from peak levels to trough levels lasted 20 months, but over half of this fall has been reversed in just the last six months.
As we have discussed in recent columns, the recovery has been led by economically-sensitive sectors such as financials, IT, materials and consumer discretionary. Once again, it was these sectors that led the market higher last week.
The single biggest factor explaining the continued outperformance of risk assets is the high amount of liquidity in the global economy. This situation continues to benefit all risky assets, as demonstrated by the continued robust performance of corporate bond and commodity markets, as well as equities.
As we approach the fourth quarter, we do not believe that the current abundant liquidity will be reversed soon. We still expect that central banks around the world will keep monetary policy extremely accommodative for many quarters rather than risk stalling the nascent recovery.
As a result, we remain in what could be called a “sweet-spot” for risk assets; valuations are undemanding, growth is returning, liquidity is high and inflation is negligible.
Our view remains that there is unlikely to be a change in market sentiment in the near future. With this in mind, we remain focused on cyclical sectors and would treat any setbacks in stock markets as an opportunity to increase equity exposure back to more normal, long-term strategic levels, particularly for those portfolios that still contain only cash and bonds in response to last September’s market turmoil. Indeed, we would reiterate our previous advice that portfolios should be fully up to weight in risk assets, as positioning for a downturn could prove to be costly.
In terms of sector positioning, we also retain the view that investors should be positioned for recovery, although within this we continue to find that industrial stocks offer better value than those in the consumer discretionary sector, which has performed very strongly since the market bottomed. Industrial stocks that look attractively valued in our view include IMI, Siemens, Deutsche Post (a logistics business), BMW and Daimler. The key for all these firms is to establish whether the recent upturn in volumes reflects a genuine improvement in end markets or simply restocking by customers who ran down inventories earlier this year. Nonetheless, early data thus far bodes well for the Q3 reporting season.
Of course, investors with long memories will recall that October is traditionally a rocky month for equities and those of a bearish disposition are quick to point out that equity markets may have run ahead of what is justified by the fundamentals. If markets do sell off in the short term, we would not expect any weakness to be severe or prolonged and, as highlighted above, would use such an outcome to rebuild exposure to risky assets where this is necessary.
Andrew Miller is regional office head of Barclays Wealth
