View the article online at http://citywire.co.uk/money/article/a658931
Why the rational investor in me says sell shares
'Sipp Investor' Rob Kyprianou considers what is next for stock markets after a strong start to 2013. His first decision is to sell the M&G UK Recovery equity fund.
As January effects go, that was some January – the best for the Dow since 1994, taking US indices to within touching distance of all time highs; the best for UK equity indices since 1989, up by over 6% in the month; and for good measure China’s Shanghai Composite rose by nearly 7% and Japan’s Topix by 9.4%.
After a decent 2012 and an excellent start to 2013, investors are left asking whether this is the real thing? This is a particularly pertinent question for those who have been holding cash, bonds, gold or any other ‘defensive’ asset in response to the debt crisis and now find themselves underweight or out of the equity rally.
The buy case for equities includes:
- The corporate sector is by far the healthiest sector globally – balance sheets are stronger than they have ever been and profit shares of GDP are growing.
- The weight of money is favourable – in January in the US, equity mutual and exchange-traded funds (ETFs) benefited from the largest inflow of cash since January 1996. This is a drop in the ocean given the cash piles invested in defensive assets during the crisis.
- Monetary authorities in the developed world have expanded their balance sheets by mind-blowing amounts in the past four years – this helps put a floor to risk and may one day support economic activity and / or inflation.
- The European Central Bank’s OMT ‘promise’ has reduced tail risk in the Euro zone.
- US risk has been reduced by the January 1st ‘fiscal cliff’ tax agreement.
- Relatively debt free, with large and growing populations and a large rising middle class, emerging markets are the new locomotives for global growth
- There are little if any alternatives offering reasonable risk adjusted returns
In this background investor caution is being replaced by a new concern – that the biggest risk is not enough risk. After all, equity markets are a forward looking indicator; might they not be telling us that this could be the year that abundant, cheap money finally gives traction to economic recovery?
My emotional side demands that I jump on the bandwagon and buy more equities out of the 34% per cent of my SIPP portfolio currently held in cash and corporate/ emerging market bonds. However, my more thoughtful side cautions me not to get carried away by the momentum. After all:
- Excessive public debt remains a headwind for growth in the US and across Europe.
- President Obama and right wing Republicans are not in a conciliatory, bridge building mood over $1.2trillion across the board sequestration cuts due by March 1st. The Congressional Budget Office forecasts only 1.4% growth in 2013 if these cuts go through.
- While banks in the West carry on rebuilding balance sheets, strengthening capital bases and removing troublesome loans, they will continue to block the explosive creation of cheap money by central banks from reaching the real economy.
- The eurozone crisis is not over as policymakers have still not found a way of dealing with excessive debt and grow their economies at the same time.
- The era of quantitative easing is coming to a close in the West as doubts grow over the prudence and effectiveness of further money printing. The ECB is already seeing its balance sheet reduce as LTRO money is repaid.
- Currency wars are not a zero sum game. It steals growth from others and can reduce total global output by artificially diverting resources away from the most productive locations. The main loser currently is the eurozone, arguably the area that can least afford to lose this war.
So far my cautious side is winning. My only activity in January was to switch out of my holdings in the M&G UK Recovery equity fund . Tom Dobell (pictured) has run the fund since 2000 delivering good long-term returns and his fund, which is still a 'star pick' in Citywire Selection, has been a long time holding across my family portfolios. I would never judge a manager over one year, especially one with a good long term record. However, in the past three years the fund has delivered below par performance and now with more than £7 billion in assets under management (AUM), excess returns seem to have become harder to generate. I have sold out of all of my holdings.
In order to gain more of a market capitalisation spread in my UK equity holdings I have reinvested the proceeds into Cazenove’s UK Smaller Companies fund which covers the AIM and small cap sector, and the Standard Life UK Smaller Companies fund which covers the mid-caps in the UK. Both these funds have established managers and good long term performance in this sector.
Otherwise, I am considering trimming some of my corporate bond holdings given their strong performance. Markets analysts are saying that only coupon returns can be expected at current yield levels, with the risk that real losses could be incurred at some time once record low government bond yields start rising.
Also, if I can contain my emotional side, I may be tempted to sell into the equity rally should it continue in the short term. Only limited real alternatives prevents me from being more aggressive. However, I am looking at finding a way to participate in the recovery of the US housing market which I believe has turned after a number of years of clearing out sub-prime lending and the backlog of repossessions.
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