Over the past six months or so equity markets have had a very nice run. The MSCI World Index is up more than 50 per cent since the March lows. It is not surprising then that some investment gurus are offering strong recommendations as to how to handle this new situation.
“Take profits because this thing has gone up too far too fast,” say some; “sell now since this is only a technical bounce in the midst of a bear market,” suggest others; “time for some ‘consolidation’” is stated by the more moderate voices; “if you sell now you will be able to get back again in a few weeks, at lower levels,” say the latter.
What to do with all this advice? Have stock markets overshot on the upside ? Are they about to reverse course?
A few facts are worth considering:
1) After a market tumbles, say 80 per cent, and then moves up 50 per cent, it is still down 70 per cent from its highs. So big market moves have to be considered in context.
2) Only a little over 10 per cent of the stocks in some markets are positive since the Lehman debacle. It appears that many have some catching up to do.
3) Many seasoned investors understand that it is extremely hard to time stock markets. Just when your intuition is telling you that the market will turn around it surprises you. So the basic advice is: “don’t try to outwit the market”.
A better investing principle is that your exposure should be commensurate with a) your risk appetite and b) your view of economic conditions over the next year or so. Your primary concern should be whether you are taking too much risk for your own peace of mind, and whether you are taking too much risk considering the likely path of economic growth.
Accordingly, you ought to be selling if the equity weighting in your portfolio has exceeded comfort levels and/or if you believe that economic conditions do not warrant current price levels.
So a critical consideration is how we perceive economic growth going forward. As always, experts differ in this regard: some say we will only see muted growth, others suggest that the economic rebound appears to be unfolding sooner rather than later.
The jury is still out on the degree and strength of the recovery and caution needs to be applied as to how much and where to invest. Ultimately, however, the motivation to sell equities should be a lot less a matter of timing the markets than applying sound principles of asset allocation and exposure to risky assets.
Michael Ranis is the Chief Investment Officer at BHI (Bank Hapoalim International), London branch