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Financial Markets: Reasons to be cheerful, whilst some investors are still on the sidelines. – swisspartners – The art of finance

Reasons to be cheerful, whilst some investors are still on the sidelines.

“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful”, Warren Buffett, Chairman of Berkshire Hathaway

Despite equity markets continuing to increase in value during the first few trading days of 2018, a fair proportion of investors remain perplexed over whether they should continue to join the equity rally, or keep a high proportion in cash. We are reminded of the joke about the businessman who asked for directions to Zurich when he was in the middle of the countryside. (Business man)– Can you direct me to Zurich? (Local resident)– Well I wouldn’t start from here.

Stock markets are of course always looking for a sense of direction and human beings are still guided by their emotions and a large amount of Private Client investment flow is based on hunches and gut feels. Moreover, staying invested in what the media calls an 8-year-old equity rally can take real determination.

The point is that many media based reporters highlight the low point of March 2009 as the beginning of the rally, and whilst this is perfectly true, it worth noting that it was only in the first quarter of 2017 that the MSCI World Equity index moved up past its previous high point of 31st December 2007. So depending on your perspective and starting point, the current rally might just be less than 1-year-old.

We acknowledge of course that Global equity markets have a long list of factors which could cause a correction; not least that America could raise its interest rates aggressively in 2018 – especially if wage inflation picks up. However, we think an aggressive set of rate rises is unlikely. For example, at the moment the US Bond futures market is suggesting that a rate rise of 0.25% in March is almost a certainty. However, it is pretty evenly split over whether there will be a follow on rate rise in June of the same year.

Other worries include that US PE ratios (Price to Earnings) ratios have increased markedly in some sectors in recent months. However, this move can be partly justified on the substantial lowering of American Corporate Tax rates which will have an immediate benefit to the profits available of many ordinary shareholders through higher dividends, etc. It is worth bearing in mind that the tax cut is the icing on the cake for US investors as earnings growth was already expected to be in the region of 10% plus for 2017.

Despite the slew of negative comments on equity market valuations from some media outlets we believe that it is still possible to find companies on both sides of the Atlantic with very healthy order books which also trade on reasonable metrics. We do of course acknowledge that these can be harder to find when compared to the low valuations which existed a few years ago. However, such opportunities do exist and this list can be increased to include companies in the midst of strategic reorganizations of their operations and those which are enjoying high top line growth, with stable margins and increasing free cash flow.

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