Ignore the prophets of doom

Pay no attention to investment lore, says Max King. Any market setback is likely to be fleeting.


Autumn's here time to buy, reckons the old adage
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Stockmarket investors are a superstitious lot, all too ready to ditch hard-headed analysis in favour of poring over mystical patterns on charts or paying homage to ancient folklore. One of the most popular messages from the runes is "sell in May and go away". In the UK, it is added that you shouldn't buy back before St Leger's day, though few know when in autumn this date falls.

The rule has a reasonable record of working, though it has become less reliable over time. Markets tend to rise from autumn to spring and then go quiet over the summer. British pundits attribute this to everyone being away over summer and Americans to the political calendar, but there is a better reason. By May, companies have released their results for the previous calendar year and, with the first quarter gone, there is good visibility on the outlook for the current year. There is little further news until the autumn, so markets tend to be dull. Then, with the current year reasonably certain, investors start to discount the outlook for next year.

If markets rise strongly over summer, as in 1987, they tend to come down with a bump when investors realise that such optimism was unjustified. If the outlook deteriorates markedly, the market will, at best, struggle. This could be due to a sharp rise in the oil price (1990 and 2007), growing evidence of financial instability (also 2007) or an overheating global economy. True to form, this year started well with the S&P 500 index rising 7.5% to the end of May. In the next three months it advanced only 2.5%, while the MSCI ex US index rose just 1.2%. This certainly didn't justify selling in May, just becoming more patient. But what now?

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There has been no euphoric rise in markets, while the prophets of doom continue to warn of calamity around the corner. The global economic outlook has barely changed, with central banks still expected to gradually tighten monetary policy. Meanwhile, the consensus forecast for the earnings growth of 11.6% for 2017 and 10.9% for 2018 for the S&P 500 index have barely changed this year, putting the index on a forward multiple of 17.5, as investment strategist Ed Yardeni notes. So the stage seems set for markets to move higher.

Jeremy Grantham, founder and head of GMO, the US-based fund managers, is uncharacteristically positive. "High profit margins and stable, low inflation dominate the feel-good list," he writes, "with stability of GDP growth a distant third. Any shift back to a lower valuation regime must be accompanied by a major and sustained fall in margins and/or a sustained rise in inflation." Neither is likely, he believes. Other markets are unlikely to fall if the US market continues to rise, and the US market is unlikely to fall if the technology sector, up 50% in dollars since April 2016, holds up. With the sector on 18.8 times this year's earnings and 16.8 times next, this is unlikely. Valuations are a far cry from 70 times forward earnings, reached in early 2000, when the path of technology development was much more uncertain.

The message for investors is simple. Ignore the prophets of doom; any market setback is likely to be fleeting. Don't wait till the end of the calendar or tax year, when stockmarkets are likely to be higher, before taking out an individual savings account. Bank deposits will continue to give you near zero interest and bond markets negligible returns, but equities look set to move upwards.

Activist watch

US hedge fund Aristeia Capital is going after $8bn Chinese internet company Sina, criticising it for "system governance shortcomings" and arguing that shareholder value has suffered, says Robyn Mak on Breakingviews. Sina is "clearly undervalued", agrees Mak; as of 18 September, it was worth $2.3bn less than the value of its 46% stake in microblogging site Weibo. Moreover, "the interloper is right to demand a bigger and more diverse board". The chairman and chief executive has a permanent seat, and "none of the four remaining directors looks very independent". Sina counters that Aristeia, which it says owns a stake of 3.5%, is pushing a "risky short-term and self-serving agenda".

In the news this week...

Hedge funds run by women have produced returns two times higher than those run by men so far this year, says Attracta Mooney in the Financial Times. The HFRX Women index, which charts the performance of female hedge-fund managers, returned 9.95% over the first seven months of 2017, relative to 4.81% for the HFRI Fund Weighted Composite index, a broader gauge of hedge funds across all strategies and genders. Female managers also outperformed the broader index over three, five and 10 years. This may not imply woman are typically better investors, of course. The number of female hedge-fund managers is far smaller (just one in 20 hedge funds employs a female portfolio manager, says the FT), and they may have had to perform better than male colleagues to get their current roles. In that case, selection bias means that they will typically be of higher quality than the average investor.

The world's largest sovereign wealth fund has reached a valuation of $1trn for the first time, reports Bloomberg. The value of Norges Bank Investment Management, which looks after the proceeds of Norway's oil wealth, has been boosted by soaring markets and a weaker US dollar. The fund's success is not all good news: it is fruitless for it to diversify into new asset classes, because these can have only a tiny impact on returns, Yngve Slyngstad, its chief executive, said recently.

Max King
Investment Writer

Max has an Economics degree from the University of Cambridge and is a chartered accountant. He worked at Investec Asset Management for 12 years, managing multi-asset funds investing in internally and externally managed funds, including investment trusts. This included a fund of investment trusts which grew to £120m+. Max has managed ten investment trusts (winning many awards) and sat on the boards of three trusts – two directorships are still active.

After 39 years in financial services, including 30 as a professional fund manager, Max took semi-retirement in 2017. Max has been a MoneyWeek columnist since 2016 writing about investment funds and more generally on markets online, plus occasional opinion pieces. He also writes for the Investment Trust Handbook each year and has contributed to The Daily Telegraph and other publications. See here for details of current investments held by Max.