Showing True Colours
Pfäffikon SZ, Switzerland – Vacationing passive investors probably don’t realise that they’ve gone through an exhilarating week. In my last weekly market outlook I wrote how this week could be crucial to the further development of the year. No more than fifteen minutes before the markets opened this Monday did the story leak that a deal had been reached with Greece. The nuclear deal with Iran and a tentative recovery in China were more cause for relief. Does that signify an end to the chill wind?
Grexit
The past few months we have estimated the likelihood of a Grexit at 40%. This is one of the reasons why over the past few weeks we have brought our European stock positions up to level. After all, a Grexit would have cost the Greeks considerably. A 50-70% devaluation would have been within the realm of possibilities. This would have plummeted Greece into a financial ice age with all the consequences it would entail.
I have personally always been a proponent of a Grexit, but not at the moment as it would now come too late in the day. Moreover I’d like to note that the actual problems will occur in 2022 when Greece will have to start making interest payments again. That leaves plenty of time to shuffle away the Greek problem into the mess of European debt. And as you know that is where our European leaders excel.
Cash
It is worth noting that many fund managers have been holding more cash than during the Lehman Brothers debacle in 2008. I wonder what they’ll start doing now that the markets are continuing to pick up. There exists a real chance that this money will once again find its way to the markets giving the already impressive bull market new momentum. A crash would also catch them unawares.
China
The hidden risk here is without a doubt China. We deliberately do not invest in China and the recent tumble in the Asian markets has past us by entirely. That has no bearing on the fact that China is an important factor, much more so than the posturing around Greece. China, however, is difficult to figure out. As a country they do not excel at transparency and have elevated the practice of shadow banking to an artform. Moreover their published statistics are highly unreliable. It is worth noting that Beijing and Moscow have increasingly been operating as partners rather than competitors. These new developments provide zealous investors with new angles and interesting opportunities.
Interest Rates
The markets are slowly showing their true colours. I would not be surprised if the current bull market persists for a while longer during the second half of 2015. Possible substantial corrections would become issues for 2016, a scenario that would comfortably fit into our projections. Janet Yellen is preparing investors, in a very cautious manner, for a new era of rising interest rates. The Fed, however, will not harm investors. I find Yellen’s display, in comparison with the highly unreliable Greek flip-flopping, a breath of fresh air. In the case of the business figures supporting the markets there will undoubtedly be new all time highs around the corner.
It remains for me to wish you a good weekend.
Jan Dwarshuis is a senior asset manager at Thirteen Asset Management AG, where he is responsible for the Thirteen Diversified Fund. Dwarshuis writes his columns in a personal capacity and is not paid for them. Nor is he paying for his columns to be placed. Professionally, he holds positions in major European, American and Russian stock funds. The information in his columns is not intended as professional investment advice or a recommendation to make certain investments. At the time of writing, he has no position in the above shares and has no intention of doing so in the next 72 hours.
