EDITOR'S LETTERMerryn Somerset Webb
How to trump the pros
What drives markets mostly comes down to three things: in the short term, liquidity and momentum; in the long term, valuation.
Look at most markets today through that prism, and it isn’t a happy picture. There is still plenty of liquidity – Japan is just getting started with real quantitative easing (QE) and Europe has a way to go. But in America there are increasing hints that there will at some point be some “tapering” of QE.
It’s hard to see how that will happen – as David Stockman explains here – the Fed is backed into a bit of a corner. But the fact that it might is enough to make any bets on markets not quite as ‘one-way’ as they have been in the last few years.
On to momentum. Look at global economies and you won’t see much of this about. I listened to Pictet’s Luca Paolini speak this week on asset allocation. One thing he pointed to was the way in which leading indicators of economies are pointing mildly downwards (for those who are interested, what he actually said was “global PMIs are converging at 49”). Then there are valuations. Regular readers will know that while we aren’t ready to call today’s equity markets a proper bubble (unlike Stockman), we do keep noting that they aren’t cheap on our favoured measure – the cyclically adjusted price/earnings ratio (Cape).
• Read the full editor’s letter here: How to trump the pros.