This blog provides a brief update on performance and views going forward.
Performance of the portfolios from 1 January up to 31 October ranges from 6.49% to 19.65%, before fees / charges.
This is broadly as it should be in a fundamentally ‘risk-on’ market where company prospects for growth are priced higher. Investors accept higher risk as they feel positive and therefore fear levels are low.
However, being a contrarian or contra-intuitive one should then ask, is this when markets get out of whack and bubbles form?
The answer historically, has been generally, yes.
Against that view ‘this time’ however one needs to factor in:
- Rates globally are staying low for the foreseeable future; up from present levels for sure, but not back to historic norms any time soon
- The big Global economies are doing better together, which is both unusual and a powerful force
- The US will most likely pass Corporate Tax reform; individual reforms will likely be gutted and minor, but Corporate cash repatriation and a circa 20% Corporate Rate going forward will be transformative
- M&A will boom with repatriation in the US; money’s got to go somewhere, and CEO’s will get drawn into an arms race, especially media
- Inflation is missing in action, throw away the economics text books, you can apparently now pump huge liquidity into the system and as long as you have the creative destruction of the internet, Amazon et al, to constantly crush prices then nothing happens
Same goes for wage inflation unless you are highly computer skilled in which case, Happy Christmas!!
Is anything cheap now? Absolutely not.
Are valuations over stretched? Depends on how you look at it.
If rates rise aggressively then bonds get crushed and equities fall (in the main), as borrowing costs and lower growth hits profits.
If they rise slowly and marginally then all past models are moot; there’s never been a 3% growth phase accompanied by 3% interest rates. Profit comparisons and therefore P/E ratios are going to be higher, (considerably higher) and that’s legitimate.
We are going to be adopting a cautious tone going forward, simply because the historic returns on equities are similar to the yield on cash plus 5%, and as an example the Adventurous Portfolio has currently returned in excess of 30% in 18 months. (Cautious portfolios have returned 15%).
It’s prudent therefore to stress that markets will go down at some point (occasionally with vigour), and excess returns can usually be attributed to borrowings from the future.
Is it possible however that markets are undergoing a genuine period of rerating to reflect a different, lower interest rate paradigm going forward?
Dangerous to assume that’s the case but just possibly it is actually what’s happening?!
Note: This is written in a personal capacity and reflects the view of the author. It does not necessarily reflect the view of LWM Consultants. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.