Many people were more than a tad surprised when Alan
Greenspan, economist and former chairman of the U.S. Federal Reserve, stated
recently that share prices were “relatively low”. This is especially so
given that the S&P 500 index has produced returns of around 160% since the
bad old days of early 2009.
Source: Bloomberg - October 2013.
It must be admitted though this was from an incredibly
low starting point. It is also interesting to note that Greenspan’s comments
are actually supported by the Fed model, a valuation method that this great
institution developed during his time as chairman.
What this model does is to basically compare earnings
estimates to treasury yields and, working on this basis, the potential
return from equities is still favourable compared to bonds. “Equity premiums
are still at a very high level, and that means that the momentum of the
market is still ultimately up,” Greenspan said.
The present rally is very much driven by the wall of
money hitting markets fresh off the QE presses which are run by the U.S.
Federal Reserve and the Bank of Japan as well as a host of other countries.
Even though things might look like they are a bit bubbly at the moment,
there seems to be no good reason to fight against the momentum that is
currently happening. In fact, riding the tide does not only seem to be less
risky than perceived, but actually the right thing to do as things stand at
the moment. The only thing to remember is to remain very liquid so that when
things start on the downward trend you can get out quickly.
It sometimes is very hard, when managing money based on
fundamental factors, to distinguish between how logic dictates how markets
should behave and how they are likely to behave. Thus, at present, it does
not really matter whether you believe the right thing is being done by
printing more money or not, as the fact is it is happening anyway.
The wise course of action, at the moment, is to focus on
which areas within liquidity driven risk asset markets to be exposed to, as
the divergence in returns up to now, combined with differing factors driving
specific markets, has left massive disparities between valuation levels.
The chart on this page compares a few indices in Dollars
over various periods and shows that the S&P is one of very few markets that
have actually reached new highs and erased the losses that resulted from the
Global Financial Crisis.
Even though the allocation decision remains the largest
driver of returns, the potential for alpha generation (especially in
Global Equity Funds) is currently massive in my opinion - this is not the
time to be hugging benchmarks.
This is not to say that whatever underperformed will
necessarily outperform going forward; it only aims to illustrate how
dispersed returns can be over specific periods of time when comparing apples
with apples (i.e. all in same currency) and even though correlations between
different equity markets are perceived to be high, the direction might be
the same whilst the quantum of gains and losses are not related. Basically,
equities are not a bad thing to be in at the moment but, as stated above,
The above data and
research was compiled from sources believed to be reliable.
However, neither MBMG International Ltd nor its officers can
accept any liability for any errors or omissions in the above
article nor bear any responsibility for any losses achieved as a
result of any actions taken or not taken as a consequence of
reading the above article. For more information please contact
Graham Macdonald on [email protected]