Strategic outlook

At the start of every month our consultancy team prepare a summary of our views on markets. We’re usually looking about a year ahead, and as a result the summary doesn’t usually change much from month to month.

We cover all the markets in which our clients may invest, and that means there’s limited coverage of bonds, although that’s where most of our client funds are. Other asset classes are more volatile, and therefore get relatively more of our time.

We aren’t doing detailed economic analyses, we leave that to clients’ investment managers. Our investment consultancy is based on a number of principles and beliefs which guide us in the advice we give our clients. Here we set out what those principles and assumptions are.

Economics

There are economic cycles in all countries, which have impacts on the bond and equity markets of those countries. With increasing globalisation those cycles have tended to become more synchronised between the major trading blocs (US, EU, Japan), and those countries dependent on exports to those blocs. Smaller economies may have different cycles, but will still be affected by the cycles of the main blocs.

The economic cycle in each country will have an impact on interest rates (and so bond markets) and equity markets in those countries. However this linkage may be very loose, and movements in equity markets may lead or lag the economic cycle, because equity markets are heavily influenced by non-economic factors.

Over the long term there has tended to be a cycle of about five years in both economic factors and equity markets, but cycles have been as short as three years and as long as ten years.

Investment Generalities

Some factors are common to equity and bond market movements. Both are affected (sometimes only lightly) by the economic cycle. Mostly financial markets are affected by investors’ expectations of what the future may bring, and at this level psychology is far more important than economics. Investors in all markets are driven by a mixture of fear uncertainty and doubt (FUD) in bear markets, and hope and greed during bull markets. An important part of understanding the current state of equity and bond markets is appreciating which of those factors is predominant at present.

For instance at the start of 2006 we were almost three years into equity bull markets in all major markets, and almost all minor ones. In historical terms three years is the average length of a bull market, and we look carefully at investor reactions to news, and at the news itself, to see how optimistic sentiment has become. It is typical of a bull market that bad news can be ignored, and good news leads to jumps in share prices. In bear markets good news is ignored and bad news leads to price falls.

Disclaimer

We don’t recommend the purchase or sale of any individual investment. Our views are high level strategic opinions of the relative merits of different asset classes. Nobody should base their investment decisions purely on our market views.