Everyone's bullish. But most people have a strong feeling that it's dangerous to be bullish. I think that pretty much sums up the feeling in the market right now.
We all know the US is fully valued and probably grossly overvalued, for example. But we also know that the US Federal Reserve is likely to keep on with its programme of quantitative easing (QE) for many months to come; that Japan, which has already printed more money than the US relative to its GDP, is only just getting warmed up; and that at some point the European Central Bank will have to join the party too. And if we have learnt anything from the last few years, it is that if you print a pile of money and chuck it into the asset markets, prices go up which is why we told you a few years ago that it didn't really matter much what you bought, as long as you bought something.
That's probably still the case. We are worried about bubbles (you could say we are always worried about bubbles), but we also recognise that QE means rising stockmarkets. So what to do? We favour caution, and holding a cash buffer. But we don't want to be out of markets. We want to be in. So the best we can do is to try to put our money in the few places where we see value, and a trigger for change that might unlock that value. That way we get to join in what we think could well be a "melt-up" in markets, but if it all goes horribly wrong which, let's face it, in a rational world, it would we stand a chance of not doing as badly as some.
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Where is that value? There's Japan, of course (regular readers need to know little more about this). But this summer I also suggested you start putting money into China. Not much, but some. In the wake of last week's Plenum we'd reiterate that suggestion. It may or may not represent "the biggest package of economic reforms since the 1980s", as Bloomberg puts it.
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But there are some radical ideas in there. The one that really grabbed me? Improvements to the corporate governance of the big state-owned enterprises (SOEs), including forcing them to pay bigger dividends. There is a view that if you are investing in China you should avoid all SOEs. I'm not so sure. They're very cheap and their corporate governance is about to improve. Avoid them? I'd target them.
The same goes for Russia, and for that matter, South Korea. They're cheap (Russia is the cheapest market in the world as far as I know) and the thing that mostly makes them cheap (bad corporate governance) is on the turn. That makes them all worth holding. Amazingly, I'm not the only one who is coming round to China at the moment. Bill is too he says that a few years out, Chinese stocks bought at today's prices "could look like great bargains". Coming from Bill, that's about as bullish as it gets.
