Mark Dampier: Opportunities still to take in 'impossible rally'
Friday 15 March 2013
Stock markets across the world started 2013 in fine form. The bears and soothsayers among us have suggested this is a final fling. I'm not able to call it either way. It is worth noting though that this bull market, which began in March 2009, has been referred to as the "impossible rally".
On 9 March 2009 the Dow Jones stood at 6,547.05 and the S&P 500 at 676.53. Some leading commentators were suggesting that the S&P 500 could go below 500 points. Instead, global stock markets rallied strongly. In sterling terms and with dividends reinvested the S&P 500 is up 124 per cent since 9 March 2009, and the FTSE All Share 116 per cent. Yet given the turbulence of the past few years it doesn't seem this way, which is why I think it is called the impossible rally.
Global economic data has been consistently poor. Half the world has been mired in what could be called a depression. The UK and eurozone don't look in better shape now than four years ago. Investors have simply not believed in the rally.
Discretionary fund managers and private investors alike have been caught out. Most have been highly cautious. Either they have held high levels of cash, standing by as rates on cash deposits fell further, or defensive investments.
The latter, to be fair, have performed reasonably well. The average investment grade corporate bond fund has achieved equity-like returns, growing by almost 50 per cent since March 2009. Yet many investors have been on the sidelines fretting over a break-up of the eurozone, Chinese economic growth slowing, US fiscal problems, or geopolitical tension in the Middle East. These risks have not gone away, but there has been a gradual diminution.
This has been coupled with increased corporate strength. Throughout 2008 and 2009 many companies, fearing Armageddon, reined in costs and strengthened their balance sheets. (If only governments had done the same!) This means many companies are cash-rich, and we are starting to see this feed through to investors via attractive dividend growth and special dividends. The only thing missing is increased merger & acquisition activity, which I think would really spur stock markets on.
Looking ahead you can't rule out a correction. That said, I think any falls could be shortlived. Those on the sidelines who missed recent gains could be desperate to get in, meaning the market could display further strength rather than prolonged weakness. Against this background global growth is creeping up and interest rates show no sign of rising. Plenty of money is being pushed into the system via quantitative easing and the Europeans haven't even started printing money. Unless there is an external shock or "black swan" event I think markets will continue rising.
As for funds, some of those I mentioned when economic headwinds were strongest have performed well. In Europe, the Henderson European Special Situations Fund springs to mind. Richard Pease, the manager, continues to favour companies that can continue growing regardless of the political or economic environment, including those increasing sales in emerging markets.
In Japan, Invesco Perpetual Japan and GLG Japan CoreAlpha have rallied strongly from their low points. Both hold large, export-oriented companies which benefited from recent currency weakness. I don't think valuations look stretched yet.
The UK, on the other hand, is written off time and again by home-grown investors. Perhaps they are too close to see companies are making hay and recent sterling weakness could surely be positive for our exporters. Funds such as Old Mutual UK Dynamic Equity, Standard Life UK Equity Unconstrained and Marlborough Special Situations could merit further investigation. All three have managers I rate highly at the helm and together provide exposure to larger, mid-sized and smaller firms.
I continue to favour using short-term stock market weakness to top up favoured investments. The past few years have shown the hazards of sitting on the sidelines, and for investors able to take a long-term view and some risk with their capital I still see opportunities ahead.
Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial advisor and stockbroker. For more details about the funds included in this column, visit www.hl.co.uk/independent
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