Global Investing

The headline news from our Reuters asset allocation polls this month was that not much has changed from December in terms of overall investment positioning, but that there was a decided shift from emerging markets and European stocks to North America.

But buried in the numbers were a couple of other things:

– Bonds are decidedly unpopular among fund managers. The overall global allocation was the lowest since February.

– Bond underweights have also been getting heavier and heavier since summer and now reflect significant bearishness.

– Within bond portfolios, however. U.S. debt was on the up, at levels not seen for at least 12 months. This contradicts the widely held view that Treasuries are losing their appeal.

– High yields are also clearly popular with a shift to “junk” from investment grade.

There is no question that the losses on stock markets at the moment are primarily the result of the Greek crisis. A downgrade of a euro zone country’s sovereign debt to junk is enough to make all but insane mainstream investors take a large step away from risk.

But could it also be that the Greek crisis has come at a time when big investors were looking for an excuse to cool down the equity rally? MSCI’s all-country world stock index hit a peak on April 15 that was not only higher than anything seen this year, but also last year as well.  Up about 85 percent from its March 2009 lows, in fact.

Partly as a result, there were some signs emerging that suggested a correction would soon be in the works.

Slightly strange data from Deutsche Börse. Its latest survey of what top European executives have been doing shows increasing signs of optimism.  That is, management board and supervisory board members and their families have been buying shares in their own companies.

All well and good. But the strangeness kicks in when it becomes apparent that a lot of this buying has been done by the top people in the south.  Of 10 companies listed for the largest insider buying, seven were from southern Europe. Of the top sells,  seven were from more northern climes.

Deutsche Börse notes this — “After Spain posted high purchase volumes last month (January), Italy has now awakened from hibernation” — but gives no particular guidance.

Let’s not beat about the bush: the winners in this year’s investment stakes were those who cashed out early in the financial crisis, looked at hugely oversold stock markets in March and jumped back in. The losers were those who spent too much time thinking about it or, worse, thought it was a good idea to put all their money in Dubai stocks and  Greek government debt.

For the winners, it all had to do with market timing. Buying MSCI’s emerging market stock index at its March 3 low brought gains of close to 110 percent.  It was “only” a bit above 72 percent for the full year. World stocks as a whole gained around 30 percent for the year and nearly 75 percent from the March low.

Gold bugs grabbed a bit of the spotlight because of the record nominal highs for the metal. But with a gain for spot gold of around 24 percent, you would have done much better buying oil, which gained more than 75 percent.

The title of this post is taken from two sources. One was a headline in British tabloid, The Sun, in January 1979, when then-prime minister James Callaghan denied that strike-torn Britain was in chaos. The second was the title of a 1975 album by prog rock band Supertramp that famously showed someone sunbathing amidst the grey awfulness of the declining industrial landscape.

Are we now getting blasé about the latest crisis? Not so long ago, perfectly respectable economists and financial analysts were talking about a new Great Depression. The world was on the brink, it was said. Now, though, consensus appears to be that it is all over bar the shouting. The world is safe.

Wealth managers at Barclays have gone as far as telling their clients to get over it.

Last week was one of the worst for global equities in a long time. MSCI’s benchmark all-country index fell 4.3 percent, the most it has lost since the week ending March 8, just before this year’s stunning rally began. Emerging market stocks, meanwhile, dropped 5.6 percent in the week, the largest fall since mid- to late-February.

As if that was not enough, volatility soared. The VIX fear gauge leapt 37.8 percent in the week, nearly 30 percent alone on Friday. Cross-sectional volatility — volatility between stocks as opposed to just the index — is also rising as can be seen  (black line) in the graph to the right.

But might it all simply be a matter of timing? Credit Suisse estimates that 22 percent of mutual funds end their fiscal year at the end of October. So the big sell off could at least in part be due to managers ensuring their end of year profits look good.

It’s 2002 all over again. Wealth managers are scrambling to get their gunshy clients bank into the market by guaranteeing them there will be no losses, or at least only a few.  They did the same thing after the internet bubble burst.

With many investors still reeling from the November 2007 to March 2009 equities crash, capital protection or guarantee  plans are making a comeback. They generally work like this:

1) An asset is chosen, perhaps a basket of something.  2) A guarantee is ensured by investing a high percentage of the principal in paper — such as a discounted zero coupon bond — that returns all the principal by the end of the product’s life. 3) The remaining money from the principal pays for options up to the full amount of the principal on the underlying asset.

It says a lot about the way investors are thinking at the moment that very good earnings from Goldman Sachs were greeted with a mini-stock selloff and a bounce for the dollar. But it is not that people are glum and selling even on good news — more a case of them being so ebullient that anything which is not outlandish is a disappointment.

The top-of-the-pile investment bank was supposed to report quarterly earnings of $4.24 a share.  Instead, it stormed in with $5.25 a share, a good 23 percent higher and an increase of 190 percent over the year earlier figure.

But on the wilder fringes of the market, speculation had been doing the rounds that the earnings-per-share figure would be around $6. It wasn’t, so Wall Street futures tanked, the dollar went positive and world stocks pared gains.

Could it be that equity and bond investors are living in the best of all worlds at the moment?

Tim Bond, head of global asset allocation at Barclays Capital, has hinted that they might be. He says that history shows current conditions to be the best for both assets.

 Since 1925, we find that in those years in which GDP was above trend and inflation below trend, U.S. equities have delivered an average 10.6 percent real return, with 20-year Treasuries delivering a 5.2 percent real return.