The trend is nigh
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We believe that one of the more costly mistakes investors could make this year is to extrapolate forward the themes of 2009.
At the beginning of 2009, the US economy had just registered a -6.4 per cent GDP contraction and a reading of 35 on the ISM index. This followed one of sharpest collapses in global trade ever recorded. Today, 12 months and gargantuan levels of stimulus later, we are coming off a positive 5.9 per cent GDP headline and a 58 reading on the ISM.
A year ago, China was embarking on a massive fiscal and credit stimulus plan that would send commodity prices and global exports surging. Today, the People’s Bank of China, along with other Asian central banks, is withdrawing stimulus.
A year ago, the Federal Reserve began quantitative easing, with a plan to add $1.25trn of mortgage debt to its balance sheet. Today, it is all about the exit strategy. A year ago, the trend in the US dollar had once again turned negative, supporting global carry trades. Today, the dollar has reversed direction and broken out decisively to the upside.
Last year offered an unsustainably good environment for corporate profits and returns on risky assets. We believe 2010 is very different.
A number of short-term lead indicators have peaked and turned sharply lower, suggesting the days of sequential improvement for the economy are likely over. Step away from the cyclical sectors, particularly as we believe that policy - makers are now constrained in their ability to respond to any renewed downturn in the economy.
Greece is in focus and debt stress is now widely considered a greater problem for the public sector than the private sector.
In many countries, there is no historical precedent for debt reduction from current levels that do not involve crisis, default or inflation. There really are no good options left in many developed economies.
The VIX index currently trades at below 20. We expect it to at least double over the course of the year as sovereign stress and a slowdown in growth collide.
Investors should favour high quality businesses in stable cashflow industries. In most cases, a portfolio of such businesses, whether it is in the UK or overseas, now trades at a discount to the market average. We expect that this too will not remain inconsequential to investors for long.
Robin McDonald is a fund manager at Cazenove Capital
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