I listened to Société Générale’s strategists – Albert Edwards, Dylan Grice and Andrew Lapthorne – outline their views on 2013 this week. They often appear here, so regular readers will have a rough idea of what they said.
Albert said the Chinese credit bubble is “as obvious a catastrophe as the US in 2007”. He expressed horror at the extent of capital outflows from China. The huge amount of money fleeing what is supposed to be the world’s most successful economy, he says, represents both capital flight (Chinese nationals taking their money somewhere safe) and the fact that China “just isn’t competitive any more”. Then, for good measure, he forecast an emerging-markets balance-of-payments crisis.
Dylan had a go at the yen (“it’s toast”). Then he explained how in devaluing money we devalue trust (it undermines the integrity of all our transactions). He expects huge social unrest as inflation cracks global social cohesion – just as it did in the Roman Empire in the third century, Britain in the 17th, France in the 18th and Russia, Germany and Zimbabwe in the 20th century. Finally, he dismissed any idea that quantitative easing (QE) will ever end. Our largely unfunded welfare states mean “ongoing QE is inevitable”. There is no other way to pay.
All predictably depressing (albeit very clever). But just before he sat down (thanks to a pre-seminar pub lunch, none of the speakers went on for too long), Albert said something so surprising I went so far as to live-tweet it (see how modern we are at MoneyWeek!). He is “the most bullish” he has been on equities for 15 years. Now, he has been very bearish for 15 years, so the shift isn’t in itself an invitation to dive in willy nilly. But it is certainly interesting. So what’s brought on this attack of optimism?
Firstly, a lot of “adjustment work” has been done in recent years. Today, some markets (think Europe) really are cheap, and even in those that are not, “there is value all over”. Secondly, there is the way in which institutions have chucked equities for bonds.
Numbers out late last year showed that UK pension funds now have more money in bonds than in equities. This, says even Albert, is “ridiculous”. At some point it must shift back the other way, which argues strongly for putting money into stocks where you can see value. Where are they?
See Honest Abe’s yen trade for Bill Bonner on Japan, New Year exuberance for some thoughts on Europe, Plant your money in a forest for our cover story on the value in the timber sector, and Three top British stocks for an interesting personal view from James Henderson of the Henderson UK Equity Fund.
Finally, the Soc Gen miseries launched their own exchange-traded product last year, focusing on high-quality income stocks (SG Global Quality Income, or SGQI). We’ll cover it in more detail in a future issue, but note that it holds the kind of stocks we like, it is cheap (0.45% a year) and retail investors can now buy it for the first time.