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Monday 05 December 2011
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Telegraph.co.uk Home News Sport Finance Comment Blogs Culture Travel Lifestyle Fashion Tech Dating Offers Jobs Companies Comment Personal Finance Economics Markets Your Business Olympics Business Business Club Money Deals Ambrose Evans-Pritchard Damian Reece Jeremy Warner Richard Fletcher Kamal Ahmed Alistair Osborne James Quinn Home» Finance» Comment» Tom Stevenson Tom Stevenson: be defensive, and remember that this too shall pass So let's just recap the string of "good" news fuelling the best week for global stock markets since November 2008, a week in which shares rose by almost 9pc, a kind of reverse correction. One thing investors have learnt this year is to expect the market to turn on its heels at the first sign of disappointment. Photo: Reuters9:30PM GMT 03 Dec 2011
Comments
What combination of positive developments could have triggered such a positive swing in investor sentiment?
Could it have been the OECD warning that we are almost certainly halfway through a double-dip recession? Maybe it was the Chancellor preparing us in his Autumn Statement for another five years of painful austerity. Or an angry public sector taking to the streets and driving a wedge between itself and a resentful and increasingly unsympathetic private sector.
What about the Governor of the Bank of England warning us about the "extraordinarily threatening environment" we've moved into? Or the growing evidence that the arteries of the global banking system are furring up as they did in the wake of the Lehman collapse? Or the slowdown in China that emerged last week? I could go on.
If ever you needed evidence that the stock market marches to a different beat than the headline writers, last week provided it. Markets don't reflect what's going on, they anticipate it, which is why investment is so much harder than it looks with the benefit of hindsight. As Jimmy Goldsmith once said, "if you see a bandwagon, it's too late".
Another investment truism is that it is better to travel than to arrive. So, if next week really is make or break time for the euro, then investors should be at least a little afraid after this extraordinary rally. It would not be the first time that Europe's politicians have disappointed us, after all.
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08 Oct 2011 var OB_permalink= 'http://www.telegraph.co.uk/finance/comment/tom-stevenson/8932373/Tom-Stevenson-be-defensive-and-remember-that-this-too-shall-pass.html'; var OB_Template="telegraph"; var OB_widgetId= 'AR_1'; var OB_langJS ='http://widgets.outbrain.com/lang_en.js'; if ( typeof(OB_Script)!='undefined' ) OutbrainStart(); else { var OB_Script = true; var str = ""; document.write(str); }That said, for the first time in this ghastly crisis the broad outline of a workable plan is beginning to take shape. Whisper it quietly, but this might just be a watershed week for the euro. It is a measure of how important a resolution in Europe is to the global economy and its financial markets that merely the hope they might pull it off has been enough to offset the litany of despair on most other fronts.
What gives investors reason to believe it might be different this time is the sense, triggered by the co-ordinated central bank move to inject liquidity on Wednesday, that those with their hands on the tiller are finally resolved to fix the problem. The necessary sequence of events is now clear – political commitment to fiscal union allows the monetary bazooka of ECB/IMF intervention which might just, in turn, buy enough time for reform and, in time, the growth which alone can right the listing ship.
However, the one thing investors have learnt this year is to expect the market to turn on its heels at the first sign of disappointment. It may come as a surprise to many that the US and UK stock markets are pretty much where they were both at the beginning of this year and the beginning of 2010 too. The roller-coaster ride, especially since the summer, makes it hard to believe that markets have essentially gone sideways for two years.
Unfortunately, I expect that volatility to continue for the foreseeable future for two reasons. First, markets are being driven by politics, not financial fundamentals. As such they are inherently unpredictable and susceptible to rapid and significant changes in sentiment.
Second, in a low-growth environment, relatively small shifts in confidence and activity can mean the difference between growth and recession. In this environment, economic cycles will be short and violent, driven by injections of fiscal and monetary stimulus and subsequent relapses into stagnation.
So how should investors respond to this environment? The easy answer is they should try and ride the cycles, abandoning a buy and hold approach, which is simply a recipe for a stomach-lurching ride to nowhere.
It's easy to see the limitations of buy and hold, but market timing is not a viable alternative. The speed with which sentiment has turned on so many occasions in the past three or four months shows just how easy it is to lose money by trying to second-guess Mr Market. That's especially so in a market in which a catalogue of appalling news can be the trigger for the headline you somehow never read: "Billions wiped on to shares".
A much better approach is to focus on quality, look for income not growth and be defensive. This too shall pass.
Tom Stevenson is an investment director at Fidelity Worldwide Investment. The views expressed are his own. He tweets at @tomstevenson63
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Comments
What combination of positive developments could have triggered such a positive swing in investor sentiment?
Could it have been the OECD warning that we are almost certainly halfway through a double-dip recession? Maybe it was the Chancellor preparing us in his Autumn Statement for another five years of painful austerity. Or an angry public sector taking to the streets and driving a wedge between itself and a resentful and increasingly unsympathetic private sector.
What about the Governor of the Bank of England warning us about the "extraordinarily threatening environment" we've moved into? Or the growing evidence that the arteries of the global banking system are furring up as they did in the wake of the Lehman collapse? Or the slowdown in China that emerged last week? I could go on.
If ever you needed evidence that the stock market marches to a different beat than the headline writers, last week provided it. Markets don't reflect what's going on, they anticipate it, which is why investment is so much harder than it looks with the benefit of hindsight. As Jimmy Goldsmith once said, "if you see a bandwagon, it's too late".
Another investment truism is that it is better to travel than to arrive. So, if next week really is make or break time for the euro, then investors should be at least a little afraid after this extraordinary rally. It would not be the first time that Europe's politicians have disappointed us, after all.
2012 is going to be bleak but selling up would be a mistake
Bond market vigilantes turn on Italy
The thing most companies seem to fear at the moment is fear itself
Why the population boom is significant to investors
Finding the next Apple may well be impossible for investors
That said, for the first time in this ghastly crisis the broad outline of a workable plan is beginning to take shape. Whisper it quietly, but this might just be a watershed week for the euro. It is a measure of how important a resolution in Europe is to the global economy and its financial markets that merely the hope they might pull it off has been enough to offset the litany of despair on most other fronts.
What gives investors reason to believe it might be different this time is the sense, triggered by the co-ordinated central bank move to inject liquidity on Wednesday, that those with their hands on the tiller are finally resolved to fix the problem. The necessary sequence of events is now clear – political commitment to fiscal union allows the monetary bazooka of ECB/IMF intervention which might just, in turn, buy enough time for reform and, in time, the growth which alone can right the listing ship.
However, the one thing investors have learnt this year is to expect the market to turn on its heels at the first sign of disappointment. It may come as a surprise to many that the US and UK stock markets are pretty much where they were both at the beginning of this year and the beginning of 2010 too. The roller-coaster ride, especially since the summer, makes it hard to believe that markets have essentially gone sideways for two years.
Unfortunately, I expect that volatility to continue for the foreseeable future for two reasons. First, markets are being driven by politics, not financial fundamentals. As such they are inherently unpredictable and susceptible to rapid and significant changes in sentiment.
Second, in a low-growth environment, relatively small shifts in confidence and activity can mean the difference between growth and recession. In this environment, economic cycles will be short and violent, driven by injections of fiscal and monetary stimulus and subsequent relapses into stagnation.
So how should investors respond to this environment? The easy answer is they should try and ride the cycles, abandoning a buy and hold approach, which is simply a recipe for a stomach-lurching ride to nowhere.
It's easy to see the limitations of buy and hold, but market timing is not a viable alternative. The speed with which sentiment has turned on so many occasions in the past three or four months shows just how easy it is to lose money by trying to second-guess Mr Market. That's especially so in a market in which a catalogue of appalling news can be the trigger for the headline you somehow never read: "Billions wiped on to shares".
A much better approach is to focus on quality, look for income not growth and be defensive. This too shall pass.
Tom Stevenson is an investment director at Fidelity Worldwide Investment. The views expressed are his own. He tweets at @tomstevenson63
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