Last week saw positive returns from most global equities amid hopes that the US tax reform bill would be passed. Oil remained flat as the OPEC nations agreed that they would keep caps on production next year. Otherwise, there was little of real interest in the newsflow. Brexit rumbles on and on, as does the formation of a government in Germany. But these are largely noise in the media – for now at least.
In recent months we have talked about the dangers of a ‘cosy consensus’ on markets leading investors to overlook the risks that may be out there. However, more recently, we have seen more diverse views appearing. By way of example, recent research from two major investment banks saw one argue that risk-adjusted returns had “deteriorated” whilst the other that they would be “high”. Well, that’s what makes a market and, at the very least, one can sell to the other…
So which is it to be? Is it time to sell and move into bonds on the one hand, or double digit equity market returns on the other? Well our view of the risk/return of anything other than the shortest dated and highest quality bonds remains clear – so that is a route we won’t be going down. However, nor are we convinced that we will see double digit returns across all major indices. That is not to say we wouldn’t like to. It would be jolly nice and would make 2018 a great year for investors. But from current levels, we feel double digit returns are unlikely.
We have been, and remain, optimistic for equities and our views are unchanged. Nor is our wariness over a short term pullback. The Bank for International Settlements became the latest institution to warn about ‘frothy’ valuations. It does leave new investors with a tricky choice. To invest now and risk missing a chance to buy in at lower levels in the near future? Or wait and see in cash and watch prices grinding slowly higher? Our view is that this sort of timing is impossible. Cash offers no real return – and even if prices dip slightly, many equities offer attractive dividends.
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