Two sides of the same coin
There are typically two types of investors referred to amongst financial market participants – ‘bulls’ and ‘bears’. The ‘bulls’ always think things are going up – a bull market is a market that is rising. ‘Bears’ always have a reason to think the market is going to fall – a bear market is a falling market. As the old saying goes, even a broken clock tells the time correctly twice a day, so each one always gets a chance to point fingers and laugh at the other.
If we take a look at markets as they stand today there are obvious arguments for both sides. If we take a look at the following in isolation, one could see a strong argument for the bull case:
Australian equities, Emerging market equities and European equities are all trading around their long term ‘average valuation’.
- Australian corporate bonds, loans and Governments bonds are offering yields above cash that are normal by historical standards:
- The world economy is growing, and we see positive sloping yield curves around the world (negative yield curves herald future recessions)
- The US Federal Reserve is increasing interest rates because they see good economic conditions, and they have positive real bond yields
If we then look at these markets in isolation, we see a very different picture:
- The US equity market is very expensive, and on one of the most well respected measures (the Cyclically Adjusted Price Earnings, or CAPE) used, it has only been this expensive prior to the Great Depression and the Tech Bubble:
- Global High Yield Bonds, European High Yield Bonds and Emerging Market Bonds are NOT offering yields above cash that are normal by historic standards – they are much lower (meaning they are very expensive)
- European and Japanese Government bonds have negative real bond yields
- The amount of debt on issuance around the world is higher today than prior to the GFC (when you include Government and Central Bank debt)
- Interest rates are at multi-generational lows
- Economic conditions are always good at the top of the market, not the bottom
So there’s a case for both arguments and good reason why investors get so emotional when they invest. It’s confusing, involves their livelihood (or life savings) and seems to have mixed messaging. The bears called 9 of the last 2 recessions whilst the bulls think things are always on a straight path to the moon…
Emotions are bad for investing
This is why you need to follow a strict process when investing that is proven to be right more often than it is wrong and will lead to greater payoffs in the long term. This is also why Euroz trough their partners Innova concentrate so heavily on managing risk, because managing risk means we need to be disciplined to reduce exposures to expensive areas and increase exposures to more attractive ones. It keeps us focussed on evidence and away from the ‘noise’ of markets, and we advise our clients to do the same.
No process or investment methodology always wins, you just have to win more than you lose. And the only wins that matter are those done in a risk controlled way. Take on risk when you are being rewarded for it but don’t take it on if you aren’t – because when the market eventually turns (remember the broken clock), if you’re invested in assets that weren’t adequately compensating you then your long term result won’t look too good.
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