Alec Stewart, Anderson Strathern Asset Management
I spotted a bear in Princes Street Gardens last week. Not something I was expecting to see. But a bear none-the-less.
As the wind bites and the vagaries of Scottish weather continue to perplex I feel a bout of conviction coming on and would strongly advise all bears to go into hibernation and let the bulls run.
I’m sure that I’m not the only fund manager to say it has been a trying year for the markets. By being vanilla but acting with a degree of conviction, when we felt it was the right thing to do, we still managed to outperform the market.
Now, I think that is all about to change, and as we move into 2016 we are ready to take risks and actively on the hunt for opportunities. As some countries increase interest rates and others battle deflation and recession, one thing is absolutely certain, there will be a divergence.
This is the first big divergence since 2009 and could mean a return to good old-fashioned arbitrage – much more interesting and indeed possible to generate excess returns – if done well.
And so finally, perhaps we are back to a bit of risk taking. People are buying and keeping stock in the likes of Apple and Microsoft but there are equally good companies elsewhere in the world whose market value has until now been suppressed due to sentiment.
We expect to see a far greater variation in returns now. For example, less capital intensive industries that benefit from low commodity prices should outperform when interest rates start to rise.
Regional themes may also provide another source of outsized returns. Although European stocks took a hit along with other equity markets they haven’t quite recovered from the summer. In our view, they represented good value before but are even better value now. Many of the regions’ problems such as high unemployment, the shortage of bank lending and the thorny Greek situation, are being fixed (even if only in the short-term).
What makes us even more optimistic about the eurozone recovery is that the ECB has been explicit on the prospect of further stimulus, in the form of expanded quantitative easing, as well as lower interest rates. The German economy, which is dominated by manufacturing, ought to continue to enjoy the European desire to print money in an effort to prop up the Union. But the nature of manufacturing means that low oil prices will benefit profitability and so increase returns for shareholders. Just last week Goldman Sachs said there is a 15% chance of oil prices halving in the short term. A weakened Euro will also help them to satiate their desire for exporting. Investors in the DAX will have certainly enjoyed the 6% rise over the last month. However, those who looked past market fears over Asia and identified South Korea as a major beneficiary of low oil prices, could have made around 25% on the rebound.
On fixed interest, US junk bonds have become more attractive thanks to the Feds’ comments on rate rises leading to a sell-off, however, we have remained sceptical about the prospects of growing amounts of US shale gas debt. Oil, good old ‘black gold’, is cheaper than US shale gas and rising interest rates will make it harder for shale companies to service their debt at a time when demand could reduce.
And what of that bear in the gardens? Woztek the Bear – a magnificent bronze statue unveiled to commemorate a rather unlikely hero of the Second World War. Already boasting his own Instagram hashtag and destined for a multitude of tourist leaflets and no doubt a very shiny nose, he really should be the only bear at large this winter.