The Opportunities growing as markets have fallen sharply, they might fall more sharply than they already have (5,000 is an obvious target for FTSE 100), and there are swirling geopolitical risks, and scary headlines. So some bad news, but also a growing volume of good news.
But the world still spins.
Throughout the developed world real people get on with their lives, go to work, build businesses, and investment opportunities persist. In fact we observe more opportunities now than for some time.
Where shall we start? Europe, oil, gold, Asia? Japan. On a number of occasions in 2015 we highlighted the opportunities in Japan. It was the top performing major market in 2015. That wasn’t genius or special insight on our part. First and foremost there were valuation attractions, creating potential. Secondly there was a focus on reform to unlock the potential, and continuing stimulus to protect the downside. It remains attractive.
Asia, on average, looks cheap. On a price to book basis it was only cheaper in 1998 (Asian financial crisis), 2001 (US terror attacks), and 2008 (global financial crisis). Yet there is no such crisis now.
Compared to the US, Europe also looks much more attractive than this time last year: the central bank is still in a very expansionary mood; the currency is cheaper than a year ago; it benefits as a net importer of oil and other commodities; French and German elections in 2017 will prompt electoral giveaways, boosting growth.
The best time to buy gold is invariably when sentiment is very negative, as it has been – there is no other sensible way to try and measure the value (or lack of it) in gold. And with oil and other commodities the ultimate cure for low prices is, well, low prices! Supply cuts and bankruptcies should soon be obvious.
Last but not least, smaller companies. You might have read that US smaller companies have been under pressure and so they have. Yet European and Japanese small caps have been doing rather well, causing some head scratching. Our view is simple. The central banks of the latter are still in expansionary mode, and if just a small amount of that largesse finds its way into relatively illiquid smaller companies, the rise in prices is disproportionate. Providing the idea of Brexit does not scare off foreign investors, a Bank of England dis-inclined to raise rates should also be supportive of UK small caps in 2016. Fingers crossed.
Some of these opportunities will certainly be a tad too volatile for our clients. But dripping money into some of these is a strategy which has worked well for us since the late 1980s. Let us know if that is something you would like to explore.
