Sitting back and taking stock, it’s striking how we hear more and more investors and commentators alike jump upon the bullish bandwagon that appears to be currently leading markets ever higher.
In our eyes, the time to get bullish (as we wrote at the time) was some months ago – at the perceived peak of investor pain, back in the dark days of August. But across a number of the regular investor surveys in recent weeks and months, the proportion of market bulls versus bears continues to march upwards. At times like this, our minds drift back to an old adage that has long struck a chord: “When there’s no one left to turn bullish, the market stops going up.” So, perhaps it’s worth asking the question. Is it too late to get bullish at this stage?
Back in the depths of eurozone despair in Q3 last year, market valuations gave us a reason to become constructive. Yes, the economic outlook appeared bleak but there is a point where markets price in such gloom. Valuations, particularly in Europe and some of the more ’beaten up’ domestic cyclical areas began to look attractive as sentiment plunged. From a risk reward perspective, using the oft mentioned ’optionality’ of cash seemed a sensible use of resources. And nimble investors have been rewarded with sizeable gains, as central banks once again opened their unconventional tool kit and let loose.
But, as conditions and, as importantly, valuations have adjusted the gains on offer at this point simply do not look as appealing. Markets are back above their near term highs; profit margins still look elevated across sectors and whilst many will contest that overall P/E (price/earnings) ratios look favourable, earnings pressure at this stage may yet make such cheapness somewhat optical. (blog continues below)
To be clear, though, it’s not a case of turning outright bearish. There are reasons to be cautious in both the economy and certain areas of markets. But there are also reasons for optimism. As a number of the fund managers we speak to have pointed out, at some stage time does begin to heal. We are, if nothing else, another year through this credit crisis and some of the more systemic problems in Europe, at least in the near term, have abated. Indeed, green shoots in the US are appearing and, if sustained, could provide a more attractive backdrop for investors going forward.
But, as ever, there is a price for everything and with equity markets some 30% off their lows and looking technically overbought, the value evident last year does not seem quite as obvious. Coming late to the party is never fashionable in financial markets and becoming bullish at this point may not provide the required long term returns that we strive to obtain.
Perhaps it’s time to reacquaint ourselves with the optionality of cash at the margin and await better opportunities to invest.
Joe Le Jehan is an analyst within the Cazenove multi-manager team.