Bond Outlook
[by bridport & cie, February 27th 2002]
Once there was a process of choosing stocks to build a portfolio
called "value investing". Readers may remember: the idea was to weigh up
likely future earnings and cash flow, all in the context of the underlying
economy, and put a price on present value. Then came "momentum investing".
This involved ignoring fundamentals and arguing that share prices would go
up further because they had gone up so far that nothing could stop them.
This approach took the NASDAQ to over 5,000. Ever since the partial
correction to the stock markets that began in early 2000, the markets have
behaved skittishly. Generally, good news is highlighted more than bad
news, with the result that fundamentals are still largely being ignored,
but the momentum has fizzled out. Today, encouraging news, like the
continued buoyancy of the housing market in the USA, can shift markets up
by over a percentage point in a day, while poorer news, like declining
consumer confidence or a new dose of "Enronitis" can send it right back
down again. We have been wondering what term best describes the
appropriate investment strategy, and thought that "pendulum investment"
might be appropriate, but that "whipsaw investment" would be an
alternative! |
|
The sense of disenchantment amongst investors is spreading. The
publication from the London Business School questioning the faith that
equities always perform better than other instruments over the long run
has been perfectly timed to reinforce investors' doubts. The booming house
market in the USA, far from heralding a turnaround, may simply reflect a
preference by the public for bricks and mortar over securities (or should
that be "timber and plaster", given the preferred building materials in
the USA?). Almost every commentator has now noticed that the great
imbalances of the American economy have not actually been repaired, so the
recovery may be a "little hampered". As we mentioned last week, pension
funds are shifting their allocations from equities to bonds.
|
|
So what is happening? Is the disenchantment being overdone?
Sometimes we think so. We see the securities of a major engineering
company being massively discounted, possibly in excess of its problems and
apparently without serious credit analysis. We see the vindictiveness
created by the squirming and the silence of Enron directors being directed
against many an innocent, and not-so-innocent, corporation and bank. Yes,
there is a case for suggesting the disenchantment is overdone and that
there are now investment opportunities. |
|
We cannot, however, "buy" this case. Our sense is rather that the
investment world is going through massive sea change, which might be
called "return to reality". For a future period to be measured in years,
not months, the economy will grow much more slowly, inflation and interest
rates will remain low, and corporate profitability will gradually return,
but then grow only at the pace of GDP expansion. Corporate profits will be
more accurately presented (finished off-balance sheet fiddles, writing off
goodwill direct to equity instead of through earnings, throwing
non-repetitive earnings in with regular earnings, and "pro forma" earnings
outlooks). These accounting changes will alone make profitability more
modest. The age of the "quick buck" is over. The time for capital
protection and assured steady return has returned. Moreover, all this is
in the context of pension responsibilities being thrown back by
governments onto individuals and the private sector just when returns on
capital are going to remain low for years to come. A lot of people will
not be retiring at 65! |
|
Japan provided a surprise this week with a big rise in the Nikkei,
apparently because the Government does not like investors selling short
and has said it will buy the shares being sold by the insurance companies.
It all sounds like market manipulation and smoke, certainly enough smoke
to hide any sign of reforms! |
|
Germany has produced positive IFO figures even as unemployment goes
up and the country has been declared to have passed through an "official"
recession (two quarters of GDP decline). France is now reaping the
(negative) rewards of its 35-hour week. Switzerland is decidedly unhappy
with itself in the aftermath of Swissair and a series of corporate
disappointments. The United Kingdom astonishes everyone, including the
British, on its economic strength. Any confidence we might have had on
Europe finding strength independently of the USA has long been dashed. The
best we can currently hope for is a return to gentle growth and moderate
returns on investment. |
|
Recommended average maturity for bonds in each
currency Some of our clients are already moving to bar-belling, but
others are just staying with short maturities. That remains our
position. |
Currency: |
USD |
GBP |
EUR |
CHF |
As of
05.12.01 |
2006 |
2006 |
2006 |
2006 |
As of
30.01.02 |
2005 |
2005 |
2005 |
2005 |
|
|
In the US, there are still mixed signals on the economic front. The
equity markets continue their sideway trading, but Treasury and Fed
officials remain optimistic that recovery is under way. It will be seen
whether today's testimony by Mr. Greenspan might reinforce that view. In
Japan, the prime minister's popularity has reached a new low, and the
package to announced today to tackle the deflationary environment shows no
concrete measures to reform the still very sick banking and insurance
sectors. Public funds continue to be poured into the stock market to
maintain the Nikkei artificially above the critical 10,000 level ahead of
the book closing at the end of March. The government interference into the
BoJ's monetary policy inspires no confidence at all. In Europe, Germany
showed an increase of the IFO index for the 4th consecutive month,
suggesting that the worst might be over and recovery under
way. |
|
EUR/USD: The euro continues to be under
pressure. Only a clear break of 0.8830 would change our still negative
outlook and speak for a recovery up to 0.9030. We are carefully watching
the extremely important support zone around 0.8500. A weekly close below
0.8480 would be catastrophic and provoke the next down move, direction
0.8350. |
|
USD/CHF: So long as we stay above
1.6750/80, the dollar remains clearly in an up-trend, with key resistance
level of 1.7250. Only a weekly close below 1.6750 would put the bullish
outlook into doubt and speak for a deeper correction, down to 1.6550
first. |
|
USD/JPY: The yen is still in its range
of 131.50 to 135.30. We expect a continual weakening of the yen, with our
first target of 136.90 followed by 141.00 |
|
EUR/JPY: We are keeping our wait and
see stance. We would reopen 50% of a long EUR/JPY position below 115.00.
Consolidation in 114 to 118 trading range may be
expected. |
|
USD/CAD: We are keeping our short
position USD/CAD at 1.5955 with a S/L at 1.6300. The price objective is
still around 1.5650. |
|
AUD/USD: The Aussie remains under
pressure. A move below the psychological barrier of 0.5000 would be
catastrophic and erase the Aussie potential to appreciate in the short
term. A clear breakout of 0.5350 would be needed for a sustained rally
towards 0.5500. |
|
GBP/CHF: Continued high volatility at
the moment with no clear trend. The exchange rate is still in its wide
range of 2.3850 to 2.4450, and may be expected to remain there unless the
USD starts to trend lower. |
|
|
USD/CHF |
EUR/USD |
EUR/CHF |
USD/JPY |
EUR/JPY |
Resistance/Breakout |
1.7250 |
0.8830 |
1.4880 |
135.30 |
118.00 |
Current spot
level |
1.7060 |
0.8650 |
1.4760 |
134.65 |
116.50 |
Support/Breakout |
1.6830 |
0.8480 |
1.4680 |
131.50 |
115.00 |
|
AUD/USD |
NZD/USD |
USD/CAD |
GBP/USD |
XAU/USD |
Resistance/Breakout |
0.5280 |
0.4310 |
1.6150 |
1.4280 |
307.50 |
Current spot
level |
0.5130 |
0.4180 |
1.6070 |
1.4170 |
299.00 |
Support/Breakout |
0.5000 |
0.4050 |
1.5880 |
1.4050 |
290.00 |
|
|