Sovereign Wealth Partners and InvestSense Pty Ltd
Even though the local market lagged a little it was still up by an impressive 11% for the month. November was one of the best months for global markets since at least the ’70s (depending on which individual market you are looking at). You may have read already in the financial press about various highs being hit and records being broken and much of the commentary about November performance will have a positive veneer. It does seem intuitive that perhaps the ‘animal spirits’ of the market have been unleashed but the reality is that such big moves tend to be associated with volatility (both upwards and downwards) and volatility tends to be associated with people losing money in the markets than making it. That is why market pundits like to say that markets go up by the stairs and down by the elevator, so an upwards move like this is quite rare, to say the least.
Traders in the eighties called this kind of market action a ‘dead cat bounce’. Maybe the saying hasn’t aged so well with the rise of animal rights and ethically aware investing but it is, as it happens, true that big moves like this tend to have happened after even bigger falls and often foreshadowed a market that remained waning for years (rather than being the start of a new bull market). For instance, the market that has enjoyed the most 10% jumps in the last 30 years in Japan has also lagged the rest of the world terribly during that time. So it is with mixed feelings that we observe that the Japanese Nikkei was up by some 15% last month while the French and Spanish equity markets were up by 22% and 27%, respectively.
On the other hand, this rally is even more unique in that it happened on all-time market highs and amidst a convulsive rotation into value and away from tech and so-called ‘Covid Safe’ stocks (the worst-performing sectors in the last week of the month were again IT, Healthcare and Utilities.) In that respect, it feels more like the early noughties which was a great set-up for markets and especially traditional value stocks. So, the jury is still out on what this rally really portends and that is partly why we are adopting a neutral/fully invested tactical positioning.
Bond markets for the month were flat and yields in the US even dipped a little into the close of the month. This is also supportive of markets as long as it is seen to be a result of yield suppression strategies by central banks. If it is more the result of typically ‘glass half empty’ bond markets seeing trouble on the horizon it might bode less well for equity markets in the future.
Lastly, and as one might expect, most commodities markets (apart from gold and silver) had enjoyed double-digit gains for the month (oil has bounced by 30% so far in November).
As you might have guessed already we have spent the last few weeks poring over the historical precedents for the rally we have seen in markets in November – this is potentially the very first time, at least in the post-war period, that all markets have moved upwards in such unison, which says something about how interlinked and global markets have become. Does greater correlation mean less diversification and how do we mitigate that?
Now perhaps more than at any other time in recent memory we think positioning within asset classes like international equities is very important. It is really anyone’s guess whether overall markets are up 12 months from now or not. There are a host of unpredictable things that will have happened in the meantime. Where we can have a bit more conviction is that if we look out a few years further there is a good chance that high single-digit returns will have proved very possible from some of the areas of the market that have been least-loved for the past few years by virtue of the cash flows that you would likely see in a normal cycle. The current market leaders (US tech stocks) on the other hand may well achieve similar results but only if they continue to grow at the rapid clip that they have for the past 10 years and investors continue to pay a higher multiple for those earnings. Already the experience of the last 10 years has been highly unusual and another 10 years of the same would be even more unusual. Investor preferences do change over time.
Lastly, the benefit of such a polarised market is that there are so many previous losers compared to only a handful of winners so it is a relatively easy task to find opportunities and diversification in a much bigger pool of unloved stocks and sectors. These are some of the reasons that we think that this latest rotation into ‘value’ will persist and if it does it will make the task of achieving portfolio objectives much easier.