Weekly Newsletter

Weekly Newsletter

This is the first of what I hope will be many Newsletters that are available to all; in these I hope to provide some (interesting) insight into how I view Investment Markets and how this could help you with your own strategy.

Risk Aversion

I have spent a good few years being pretty risk averse and concerned that ultra-low interest rates and the huge levels of liquidity (QE) introduced by Central Banks has made investors complacent and increasingly willing to risk there capital for ever diminishing returns.

However investments can carry on rising indefinitely if enough people have faith in whatever they see as the driver of returns – insert in here “drivers” such as Technology, the Housing Market and now QE – regardless of fundamentals. Typically these have pretty unpleasant outcomes and looking back there is always a trigger or catalysts that changes investors perception turning them into sellers rather than buyers.

The deadlock in Greece and its possible exit from the Euro could be a potential trigger and this week has seen the UK’s FTSE-100 take a significant hit; however this may well be just a continuation of the trend that started in April after the FTSE-100 reached a multi-year high.

The last 44 days have seen the FTSE-100 decline by just over 8%

The last 44 days have seen the FTSE-100 decline by just over 8%

If all this is sounding a bit familiar its because it is; the crisis in Greece really ignited in late 2009 as their credit rating was downgraded and an IMF aid package put in place but only if the country introduced a strict austerity package. The next two years were punctuated by social unrest, elections and stand-offs with the IMF and European Central Bank. Over the period investors lurched between “risk on” and “risk off” leaving the FTSE-100 only 2% higher at the end of 2011 almost two years later. Well we may be off again and the potential for a similar pattern exists – although I wouldn’t rule out a sharp move in either direction – here’s a comparison between now and five years ago.

greece 2010 2015

Future Returns

The decline in the UK market has brought down risk levels, but they still remain elevated and potential returns from the FTSE-100 for the next 5 years based on individual indicators remain depressed with some negative. Using reliable long term measures such as PE10 (Price / 10 Year Average EPS), Price to Sales, Price to Book, Market Cap and Tobins-Q to create a model of potential returns currently puts these in the region of 4.5% per annum…..in the current low interest rate environment investors may consider this acceptable but in the long run there have clearly been better times to be heavily invested in shares (for a summary of how this is created why not watch my short presentation Market Returns).

Combination of reliable indicators give a good guideline of future returns

Combination of reliable indicators give a good guideline of future returns

I also thought it would be interesting to overlay the FTSE-100 to this graph and see if it told us anything; the results are below and the blue line of the FTSE-100 is inverted. What appears clear is that up until 2010/2011 the correlation was pretty tight but QE may have broken affected this relationship as I would have expected the FTSE-100 to be lower  to generate the current implied returns.

stats and divergence

Despite these concerns as always there are pockets of opportunities that should at least be investigated; over the last year the FTSE-All Share has just about broken even but in there the performance of different sectors is much more of a mixed bag with Household Goods & Construction Sector up almost 30% whilst the Oil Equipment & Services Sector has fallen over 25%. There may be “value traps” in these fallers but some Considered Investing may unearth something interesting………

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