06 Mar Market Commentary – March 2014
March 6th marks the 5th anniversary of the market nadir during the crash of 2008/2009. On that day 5 years ago the S&P500 index of the top 500 shares on the U.S. market, bottomed at 666.79. In Australia the All Ordinaries index hit an intraday low of 3091.60. As at the time of writing the U.S. market has increased in value by in excess of 276%, the Australian market by 57%. In context the U.S. market fell 56.8% up until that weekend, while the Australian market fell 54.9%. Many clients have been with us through the whole episode and we thank them for maintaining the faith during the most trying of times. The recovery, as you are well aware, has been anything but linear in trajectory. Several false starts over the years tested our patience and kept us circumspect about market prognostications.
We are naturally more interested in what the future holds than what the past has provided. Nevertheless we accept the maxim first propagated by Edmund Burke “Those who don’t know history are doomed to repeat it”. We tend to believe most people are susceptible in this regard and thus we experience cycles in economic conditions and markets.
So, what did we learn over the past 5 years?
- If anyone tells you ‘this time is different’ slowly back away to safe distance. The actors change, the scenery is modernised, but the play is essentially the same.
- Do not rely on authorities to have a solution. During the depths of 2008/09 it was clear that Governments and central banks were making it up as they went. While this appears contrary to the first point, it is more a reflection of the quote above.
- Complexity breeds fragility. The underlying causes of the crash were amplified by the fact that people did not know what their potential risks were.
- Stability leads to instability. This theory was articulated by Hyman Minksy some 40 years ago and supports the underlying theory of economic cycles.
- The underlying cause of most, if not all, financial crises is debt. It may have been re-packaged, re-regulated and re-hypothecated but it is always about the ability of somebody to pay somebody else back.
As you read this we continue to enjoy relative stability. Despite issues, in Russia, Thailand & Venezuela, global economic growth is positive, if tepid. Company profits are for the most part healthy and monetary conditions remain accommodative. While we are in a good part of the cycle, the longevities of cycles vary and are difficult to predict. Up until 2008 authorities had seemed to have been successful in reducing the amplitude of cycles – ‘the great moderation’ according to Alan Greenspan. However true to Minsky’s theory, this just seemed to defer instability until the events of 2008. Having been through such a severe event it is logical to infer we will remain in a period of stability proportional to the event. However the policies that ‘saved the world’ since 2008, are largely un-tested, therefore the side-effects are difficult to assess. The private sector continues to de-leverage despite record low interest rates. At the same time the public sector continues to increase debt to try and plug the ‘demand gap’. Of course, at the end of the day we, the taxpayers, will pay down the public debt. It remains to be seen how this is engineered, but I would not pencil in any tax cuts are benefit increases for a while. Deflationary headwinds remain the main focus of central banks who recognise the risks of a Japan-like stagnation.
In the short term, emerging markets may remain under pressure, however we believe they are starting to look relatively attractive. Strength in developed markets may persist, however valuations appear stretched in some sectors. While equity market strength continues, returns from fixed interest investments will remain subdued. Nevertheless the equity market correction in January again highlighted the need to retain a suitable exposure to defensive assets. Australian equity markets are enjoying the benefit of global market momentum, however this disguises increasing divergence between the fortunes of individual companies. This reflects the local economic conditions companies are dealing with as well as those of our major trading partners.
So cheers to the 5th anniversary of the bottom of the crash. That period was a particularly long and arduous ‘Winter’. The investment ‘Spring’ was variable, but on the whole, encouraging. We are perhaps now into the late ‘Summer’ of this cycle. We do not know what the ‘Autumn’ will be like or how long it will last. Moreover the next ‘Winter’ may be especially mild. We just don’t know. However we can take steps to prepare for the change in seasons. To torture this analogy a little more, this does not mean lighting up the fire in March. It is more about ensuing that the wood is chopped before it gets cold.