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Alan Brierley: The game has changed – now is the time to sell the rallies

As George W Bush said in one of his more eloquent moments: ‘This sucker could go down.’


Global equity markets have delivered significant gains since March 2009. However, the return of volatility in recent weeks has acted as a timely reminder of growing underlying risks. We expect further weakness in coming months.

Although the perma-bulls continue to bang the equity drum, the reality is that the FTSE All-Share is now at the same level as 1998 – we are already well into our second lost decade. While we are told that the UK is not Japan, given the parlous state of the domestic economic backdrop following years of ‘prudent’ management, the spectre of the Japanese experience looms large.    

Just as we heard during the summer of 2008, high levels of cash on the sidelines will prevent any significant sell-off. With these investments now yielding virtually nothing, we are told that investors must invest in equities. We see material flaws in this argument. While this approach may produce a healthy yield, there are risks that capital falls could effectively wipe out many years of income streams. Surely a total return of 0% is better than -20% or -30%?

The global economy is set to encounter more challenging headwinds. While economic growth has rebounded from near-depression levels, much has been the result of unprecedented policy actions. At some point, developed economies will have to cope with the exit strategy from these policy measures – the risk of error is huge. In Europe, the macro environment is deteriorating rapidly while there is increasing evidence of over-heating in China.

With Western economies now facing a prolonged period of deleveraging, which is likely to condemn them to several years of sub-trend growth, we struggle to see how equities represent good value. One of our favourite metrics is the cyclically adjusted price/earnings, which incorporates average earnings over the past 10 years. Even after the recent sell-off, the S&P Composite index is still trading 30% above its long-term average. 

Political risks

Geopolitical risk has increased dramatically in recent weeks. With little sign of any light at the end of the tunnel in either Iraq or Afghanistan, recent developments in South/North Korea, Israel/Iran and Pakistan are a cause for concern.

With the storm clouds again gathering for equities, we believe that now is the time to de-risk portfolios. In addition to raising cash levels, we would raise exposure to defensive equities and alternative asset classes whose progress is not dependent on equity markets. Our core recommendations are BH Macro and Phaunos Timber.

BH Macro  has low exposure to equity markets and we believe it has a key role to play in improving portfolio diversification. We would expect the highest returns to be generated during periods when risk assets underperform and so we expect the next few months to be a fertile environment for the managers to extend a genuinely exceptional performance record.

Phaunos Timber  is now approaching full investment, with a focus on emerging economies. Net asset value (NAV) has begun to gain traction and we would expect the company to begin paying dividends in the next year. Somewhat inexplicably, the shares trade on a 33% discount; we expect solid NAV gains to be materially compounded as the shares re-rate from these distressed levels.

For the past 14 months, the ‘buy the dip’ mantra has helped investors to enjoy spectacular returns. However, the game has now changed and this approach is now redundant. Although investors continue to believe they can exit at the top of the cycle, the recent flash crash (which wiped out $1 trillion of value in 16 minutes), highlighted the dangers of investors simultaneously rushing for the exits.

As George W Bush said in one of his more eloquent moments: ‘This sucker could go down.’

2 comments so far. Why not have your say?


Jun 07, 2010 at 19:16

In a word-NO.

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David Stoddart

Jun 14, 2010 at 10:16

Is it really all Doom & Gloom,

What about Emerging Markets and Property Recovery ??

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