One of the many press releases I received this week has got me a little worried. It says that a mere 25% of financial advisers think that the recent massive rally in the stock market – the FTSE 100 is at a four-month high – represents the beginning of a new bull market.
So what makes me worried about that?
It isn’t that I think this is the wrong view. No, it is that I absolutely agree. It’s being part of the consensus that makes me feel mildly uncomfortable. Remember how consensus opinion had it that house prices would never fall, that there wouldn’t be a recession, then that there would only be a mild recession, that stock prices were never overvalued, that Asian markets were safe because their economies had effectively decoupled from the west? If so, you’ll see what I mean.
Still, however much I think about it, I can’t bring myself to change my mind on this. There are a few statistics that suggest that the speed at which economic disaster is coming at us is declining slightly. But few that suggest it has really been averted.
House prices are still falling almost everywhere in the US and here (except, rather oddly, Orkney). And the banking crisis is still far from over: lending is still weak and defaults still rising. So it’s hard to see how it is possible for the green shoots popping up all over to be much more than blips in a downward trend.
It is also worth noting that this rally has little in common with the beginning of most real bull markets. Valuations never got really cheap and volumes still haven’t picked up: in total, there isn’t any more trading on the FTSE 100 now than there was before the most recent bottom was hit.
For a recovery to be really convincing, you want to see more investors getting in and doing so in a bigger way (just as in the housing market where a few houses selling for more than expected is considered a statistical blip, not a recovery). It has also been led very much by the junk – the banks, for example – rather than by anything new.
On the plus side, the number of people losing their nerve and defecting to the bulls seems to be on the up, suggesting the whole thing has further to run.
Anyone judged on relative returns and not fully invested right now will be feeling terribly anxious: it won’t take much more to get them back into the market, something that could easily give us a market “melt up”.
When that happens, I’ll be thinking of Japan. All through the 1990s, an occasional bit of good economic news from Japan would drive the foreigners into a frenzy of excitement, driving the market up 40% or so before everyone noticed that the economy hadn’t improved at all – at which point, the market would collapse to below its starting point.
Still, what if the advisers and I are wrong? What if the last four months represent a new reality – one where risk has once again been abolished, where banks are solvent, where governments can sell as many bonds as they fancy, where high taxes don’t discourage entrepreneurship and where earnings are growing again?
In this new world, how does one invest in the upturn? My answer – again – is Japan. I’ve been keen on the Japanese market – with utterly dismal results – for years now. Sterling investors won’t have done too badly in Japan thanks to the yen’s strength against the pound. But still, it’s been a bad call.
On the plus side, the reason it has been a bad call is because the market is perceived as being so heavily leveraged to global growth. If that comes back, so should Japan.
Japanese equities are also exceptionally cheap (on a price to book ratio of around one, for example) and the economy could find itself growing again before the rest of the world.
Jonathan Allum of KBC points to the fact that economists surveyed by the Nikkei are forecasting positive GDP growth of 1.4% in the April-June quarter and notes that most measures of confidence are perking up.
Finally, the Japanese market has met one of the key criteria for the end of a long bear market: it has succeeded in making almost everyone lose interest in it. No matter how cheap it gets, no one cares.
So there you go. If this is a real recovery for economies and markets, you could do worse than pile into cheap global growth- orientated markets such as Japan.
But it could be something else altogether: a bear market rally doing what bear market rallies do best – being long enough and strong enough to scare the bears, draw them back in, and lose them their shirts.
• This article was first published in the Financial Times