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A glass half full

Investment markets have to deal with uncertainty yet again, this time as a result of tensions in the Middle East and North Africa and it is difficult to say what the implications are for stock and bond prices. These issues add to the many economic uncertainties prevailing in this unusual time and the variety of forecasts and predictions from respected commenators remain extreme.

So is the glass half empty or half full? The answer depends if you are talking about equities and real assets or bonds, which come in an ever increasing array of flavours. There is plenty to worry about but a quick glance at a FTSE 100 chart shows this index was trading at just over 5,900 13 years ago, as it is while writing this article. This is an almost unprecedented period when there has been no benefit to investors in holding shares over cash – indeed, quite the reverse on a total return basis.

Managers on both sides of the Atlantic give us grounds for optimism. Company balance sheets are in rude health, operating margins are at high levels and cash on balance sheets is strong. Merger and acquisition activity is starting to pick up and dividends are improving.

What gives us further grounds to say we are living in a half-full rather than half-empty environment for real productive assets is that US private sector capital expenditure is at a 60-year low. As this starts to improve – as it surely must because growth without this is not sustainable – then the unemployment rate is likely to start to fall. This will not happen overnight, given the severity of the downturn we have endured, but from here I can say with confidence that the outlook for the next 10 years using today’s FTSE 100 entry point is likely to be more rewarding than the last 13.

There is rising confidence coming from managers that we might be entering a boon time for the quality stockpicker and moving gradually away from portfolio returns being driven by extreme macro influences.

Opportunities for quality stockpickers are increasing, created by the push towards passive and short-term trading strategies and this adds to our optimism for actively managed and diversified portfolios in the coming year.

We are less optimistic on fixed income as interest rates will have to start to normalise at some point. We are more attracted to corporate bonds, particularly higher yield issuers on a relative basis. With inflationary tensions mounting, property also seems reasonably placed as a diversifier where appropriate.

There will be setbacks on the road ahead but we are optimistic that equity markets will be higher at the end of the year than they are today – and history is on our side.

Gary Potter is co-head at Thames River Multi Capital



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