Multi-managerOct 30 2013

Marcus Brookes: Why further progress may be dull

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This is the time of the year when investors begin to position for the next calendar year.

Often this process begins with a look back over the market trends that appear to have been in place and some sort of subjective assessment about their ability to persist further, with a hint of macro analysis and forecasting added to the pot. So how would we look to characterise 2013 so far?

To begin this we will look at some headline statistics - all data from Lipper Hindsight and to October 24 2013.

The FTSE All Share has managed to return 14.4 per cent, comfortably beating FTSE British Government All Stocks index of gilts which has lost 2.7 per cent. The beginning of this year saw plenty of articles that discussed whether or not we would see a rotation out of bonds and into equity. Performance suggests that this may have begun, though anecdotal evidence suggests most investments into equity were made from reducing cash.

Perhaps this is a trend that we may see persist. Corporate credit has been lacklustre, with the Bank of America Merrill Lynch Sterling Corporate Bond index returning 1.6 per cent, which does not look too good after the effects of inflation. Just for completeness, the gold price is down 19.9 per cent.

So will 2014 see a continuation of these themes? We suspect that it may, but perhaps there may be some subtle differences.

While the overall FTSE All Share index has returned 14.4 per cent, the dispersion among sectors is pretty large. Leisure goods, fixed line telecoms, life assurance, media and general retailers have all returned more than 35 per cent, but mining, basic materials and oil & gas have all given negative returns.

On the face of it this performance might suggest that domestic cyclicals have run rather hard already - perhaps the market managed to determine that UK economic growth might be as good as it has recently appeared. The more globally-oriented sectors such as energy and mining appear to be the laggards for now.

Our own conclusions have not yet been made, apart from perhaps a recognition that reducing the winners and adding to the weaker areas might prove to be sensible over the course of 2014. This means investing in underperforming areas which many investors know they need to do, but rarely seem have the appetite for. That said, any accumulation should probably be done in a measured way.

There is an implied assumption here that adding to equities will prove to be the correct strategy. We remain happy to be invested in this asset class for now, but we are cognisant that investors have made very good returns for each of the past four calendar years, with 2013 shaping up to be another good year to make it five (largely) good years.

It is tempting to suggest that this bullish five-year period has been one that many investors failed to fully believe in, with annual intra-year setbacks confirming the bears’ worries, but on reflection there was plenty to be positive about.

One area we are becoming more concerned about is the general level of valuation that these bullish markets have managed to achieve. We are not suggesting they are too rich, but they represent poorer value than at the start of the year and, unless we see significant pick up in profits growth, further progress may prove to be pretty dull - but perhaps better than government securities.

Marcus Brookes is a fund manager on the Cazenove Capital Multi-Manager range