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Market commentary: Jan/Feb 2013

By January 28, 2013No Comments

SUMMARY. This time last year we said the key investor skill in 2012 could be a handbrake turn. Whether or not that point arose in the Summer, when Mario Draghi promised to do “whatever it takes” to save the euro, 2013 is full of investor dilemmas. We discuss these here, with some answers in the latest TopFunds Guide, out later this week. Do email now to be sent your copy.

P.S. This monthly note covers January and February. The next monthly note will be in the first week of March.

This time last year we suggested that the key investor skill in 2012 could be a handbrake turn – the ability to change course under conditions of great uncertainty. During 2012, once the head of the ECB Mario Draghi had said he would “do whatever it takes” to save the euro, many investors certainly took this as their cue to undertake this maneuver, switching more heavily into stock markets.

And yet, for all the excitement generated, the FTSE 100 index was up just 5.8% for the year – respectable, but not exciting, and very volatile. In contrast, the average corporate bond fund was up 11%, with little volatility. Therein lies the first dilemma for 2013:

  • Should you now join those who have become much more relaxed about stock market risk, based largely on warm words, and despite economic uncertainty remaining very high? OR
  • Should you stay loyal to the bond funds that have generated unexpectedly chunky returns, even though that uptrend is a VERY mature 30-odd years?

The second investor dilemma concerns markets, bonds and equities, being rigged in the short term by design. Central banks (e.g. the Bank of England, US Federal Reserve, European Central Bank) are working very closely together. In preventing much worse economic conditions central bankers have also pushed investment markets much higher than can be justified by fundamentals, and this applies to bonds and equities.

Herein lies the second investor dilemma:

  • Should you buy any markets, particularly stock markets, where central banks are artificially pushing values higher? OR
  • Should you buy markets beyond the indebted Western markets, which you might ordinarily regard as higher risk, but which aren’t rigged, and do benefit from better fundamentals e.g. China, India.

We attempt to answer these questions in the latest TopFunds Guide, which is out later this week. Do ask for your copy by emailing now.

Dennehy Wealth