A little while back I worried that many investors’ knack for poor timing might mean, should we ever reach the sort of equity fund flows that could transform a common or garden rotation into a great one, we would also not be very far from bubble territory. I felt bad at the time for pooping a party that had not even started but it turns out that, as a killjoy, I have some way to go if I want to turn professional.
Believe it or not – and I know this because until recently I was one – there are actually people out there who will argue there is a fair bit of economic and financial good news around at present – not if you are wholly exposed to fixed income, perhaps, but certainly if you have an interest in the potentially more fun parts of investment such as equities.
But these poor benighted souls are wrong to do so. They have yet to learn every such piece of good news has a counterargument. Warm up with a loosener such as an uptick in GDP growth in developed markets and it is swatted back that these come from such low bases they are almost meaningless – and then comes the follow-up point of downticks in emerging markets growth, most notably China.
Try something a little more inward-looking such as the UK government’s efforts to stimulate the country’s housing market and you will be met with sheer disbelief that any administration could think it was helping first-time buyers by increasing demand for a fixed supply as ultimately that can only force prices upwards.
The big-league party-pooping that finally caused me to forsake all hope of any sort of happier days for investment came when I suggested to a fund manager the recent increase in merger and acquisition activity might be seen as a reason for cautious optimism. After all, that is just basic investment thinking, right?
Wrong. I now know the increase in activity is actually a reason for unalloyed pessimism because, while M&A is highly correlated with market levels, it is not so in a good way. Company managements, like investors, ought to do their buying at the bottom of the market but, like investors, tend to leave things until markets are up and they are more confident – by which time value has left the building.
By extension, anyone who has been sitting back waiting for things to feel more comfortable – for example, waiting for developed market GDP growth to tick up at all or for M&A to start happening to the degree it appears to be now – will have left things too late. The good returns will have been made by those who invested when they were feeling sick in their stomach.
It is of course perfectly possible some people will at least learn from that experience and steel themselves to move more quickly in the next economic cycle. Apparently my boyish optimism has not been completely beaten out of me after all.
Julian Marr is editorial director of Adviser-Hub and co-author of Investing in emerging markets – the BRIC economies and beyond
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