Unlike the London housing market that seems to rise every year, the stock market had another year of wild gyrations.
The period January to March was characterised by shares declining dramatically. Gloom dominated the media headlines and most fund managers were very defensively positioned or profoundly depressed. By this we mean fund cash levels were high and investments that were held, such as food manufacturing, pharmaceuticals and utilities, were cautious. To some extent this was true of our fund as well, although we never had high cash levels as this was inappropriate after markets had fallen heavily.
Then it gradually became apparent to investors that although the consumer was in recession, swift government action had avoided a depression, which was beginning to be priced into markets. Indeed, companies that had also been whipped into a frenzy of negative thinking began to see restocking by both retailers and further up the supply chain as well. Investors reacted very fast to this development and redeployed their cash into the more economically sensitive areas such as manufacturing and financials. Shares in these sectors rose dramatically whereas many of the ones that had held up well during the crash hardly moved up at all.
In the third quarter of 2009 things got even better, being one of the strongest quarters, in terms of capital appreciation on record. Investors took heart that European and world economic growth really was returning. With investor equity weightings being at a record low, the scope for re-purchasing continued to be substantial. In fact the only significant purchasers of shares in recent years have been a few sovereign wealth funds, while pension funds and insurance companies have been ongoing sellers.
As we write markets continue to move up. Most retail investors have given up on European shares, scared off by the volatility and the fact that even after the rally market indices are broadly where they were 10 years ago. Indeed they are probably vaguely thinking of a conversation between Alice and the White Queen in Lewis Carroll’s Through the Looking Glass, when the White Queen offers Alice jam every other day as an inducement to work for her:
“The rule is, jam tomorrow and jam yesterday – but never jam to-day.”
“It must come sometimes to jam today,’” Alice objected.
“No, it can’t,” said the Queen. “It is jam every other day: today is not any other day, you know.”
Perhaps just when everyone has given up on shares they will outperform the jam today of London housing.
Chris Garsten is manager of the PSigma European Income fund
