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Multi-manager view

Investor attitude to risk has swung back into bearish territory. Investors are again more concerned with the risk of losing money than of missing opportunity on the upside. It does not yet feel as though we are at an extreme but, in certain asset classes, we are getting close.

For European equities, revulsion is surely just a stone’s throw away. As at June 1, the market capitalisation of the Italian financial sector was about the same as that of Colgate-Palmolive. The market cap of Portuguese equities was the same as Whole Foods (the 191st-biggest stock in the S&P 500) and the aggregate market cap of Greek equities was that of TripAdvisor (the 400th- biggest company in the S&P).

As renowned bear Albert Edwards of Société Générale recently said: “Amid the chaos, there is opportunity. The European cyclically adjusted p/e (Cape) is back to rock-bottom valuations, consistent with the bottom of previous long-term valuation bear markets and lower than that seen in March 2009. Investors are reluctant to invest amid all the ongoing chaos in the eurozone but the macro backdrop always looks awful when the market is this cheap. There are no such things as toxic assets, only toxic prices.”

European equities in aggregate are trading at a 50 per cent discount to their US counterparts. Today’s valuations would seem to represent the platform for fabulous long-term returns from European equities. Perhaps not this month or next but for those afforded the luxury of a decent time horizon, buying distressed European assets today should prove profitable over time.

At the opposite end of the spectrum, the aforementioned prospect does not apply to so-called safe government bonds.
The US 10-year government bond yield hit a low of 1.438 per cent on June 1, its lowest level ever. Yields on comparable bonds elsewhere are lower still – Singapore 1.37 per cent, Taiwan and Germany 1.17 per cent, Sweden 1.11 per cent, Denmark 0.93 per cent, Hong Kong 0.88 per cent, Japan 0.80 per cent and Switzerland 0.47 per cent. Three years into this stop-start recovery, the recent plunge in yields of safe assets reflect the delicacy of the global economic backdrop.

Meanwhile, bonds are at the mature end of their longest and biggest bull market on record. Applying a similar time horizon, buying an extended market after three decades of price appreciation, during which time yields have fallen by 91 per cent, is a bad idea.

Major discrepancies in valuations exist globally. When is cheap, cheap enough? Who knows. It would be futile to attempt to catch the bottom in Europe but many European equities are discounting just about any outcome and on a 10-year view, European equities will likely prove fabulous investments. The same cannot be said of many “safe” assets, not just government bonds.

Robin McDonald, fund manager, Cazenove Multi-Manager Diversity range


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