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Don’t Sell Everything

“Sell Everything!” screamed yesterday’s headline in the Telegraph, amongst other places. 

RBS head of credit was feeling particularly bearish this week and managed to secure himself some great publicity by warning of a “cataclysmic year”. “Sell everything except high quality bonds. This is about return of capital, not return on capital,” said Andrew Roberts.

There are a few things we need to bear in mind when we read things like this. Firstly, remember that good news is not news, and the only sure fire way to secure press coverage is to be even more negative than the next bear. Hence why, a couple of days after the first headlines predicting $20 oil, we’re now seeing others coming out and forecasting $10 a barrel. Wonder what they were forecasting when oil was $100 a barrel?

Secondly, we should remember this is just one guy’s opinion. Apart from anything, we all have unconscious bias, even when looking at the same data. Roberts is a bond investor – they tend to be miserable types - and of course he’s telling us to sell everything except bonds.

We should perhaps look back at other things he has said in the past and find out whether he’s been any good at forecasting.

Here is what Roberts was saying back in 2010 (also from the Telegraph): 

"We cannot stress enough how strongly we believe that a cliff-edge may be around the corner, for the global banking system (particularly in Europe) and for the global economy. Think the unthinkable.”

If someone was predicting disaster in 2010 (which didn’t happen) and is predicting disaster now, we should ask ourselves why we believe them this time. There are various commentators out there in the City who are constantly predicting doom. Perhaps one time they will end up being right but there will be many more times when they’re not.

Opinion or fact?

We should also look at some of the facts and decide for ourselves what we think is happening.

There is no doubt that things don’t look as rosy as they did a few years ago. There have been a number of issues arising at the same time, which are all pushing down on stockmarkets:

  1. Slowing growth in China
  2. An increasing supply in oil and gas partly as a result of new fracking techniques
  3. Interest rates going up in the US with speculation of further hikes. Which leads to…
  4. A rising dollar
  5. Falling energy prices as a result of points 1 (reduced demand), 2 (increased supply) and 4 (strong dollar – see below)

One thing that is often not mentioned in the press is the effect of the strong dollar on commodity prices. As commodities are priced in dollars there is a very strong correlation between a rising dollar and falling prices. This has exacerbated the imbalance between supply and demand.

Falling commodity prices have led to falling profits in commodity related companies. As a result, their prices have fallen substantially and this has a big effect on markets.

However, non-commodity related areas of the market are still doing okay. The chart below from Factset shows profit growth in the main US index, the S&P 500, over the past 12 months.

Overall, profits for S&P 500 companies are down 0.7%. However, this disguises massive divergence between sectors:


Only four sectors actually saw profits fall, whereas six sectors saw profits rise. The overall picture is damaged by materials where earnings were down 8.1%, and energy where earnings were down 59%. Meanwhile, Telecom profits were up by c19%.

The market has also been spooked by China’s heavy handed approach to markets. Their interventions have been clumsy and look panicked, which naturally make investors think that things are worse in China than the data suggests.

Various Chinese indicators show that growth is slowing but most forecasters still believe it remains above 6% pa. That is slower than we are used to but is probably where China should be at its stage of development.

We are not saying everything is rosy. We think stockmarkets in general still don’t look great value, being typically slightly above long term average valuations. That doesn’t mean we think they should fall but perhaps grow only weakly. However, there are some areas of the market on which we are much more positive.

We also don’t just invest in equities. Sectors like UK commercial property remain unaffected by any of these issues to date. We also invest in a number of “alternative” funds which have continued to produce returns regardless of market turmoil. Some funds actually profit from it. We may well increase allocation to this type of areas going forward.

We have also been able to profit from volatility by buying on the dips and selling when markets recover in most portfolios. Twice in the past few months we have been able to bank gains on these trades. We also have two more of these trading “in play” right now, one of which is currently down but another is in profit as I write. In aggregate these trades are generally showing a profit.

We are more cautious than we have been in the past and are continuing to focus just as much on keeping risk down as chasing returns. However, some of the headlines are way over the top and are downright damaging in our view.

The information provided through the Equilibrium website is based on our opinion and is for general information purposes only. It is not, and should not be construed as financial advice.