Weekly Market Commentary
du Pasquier Asset Management
By Scotty George
August 27, 2012
For many weeks, I have received feedback from readers of my commentary that I am “too negative,” “too pessimistic” in my views about the markets. While it is true that my objective quantitative science leaves little room for interpretation, let me dispel the notion that it is I, not my data, that is contemptuous of the “next move.”
In fact, I would argue that owing to the duration of our bear market (whose origins date back over 5 years), the necessary elements for a reversal in course are closer today than they were on day one of the bear’s initiation. Both market valuation and sentiment indicators have taken precipitous falls from their highs. A severe degree of pessimism is necessary for the seeds of a bull market upside reversal to occur. Now that global policy makers are aware of the level of investor disinterest and mistrust, they are slowly acting upon policy which might reflate economies. After all, how much lower can interest rates go before we consumers begin to “drink from the trough?”
While current demand for credit is slow, any increases in capital borrowings and expenditures going forward would be a welcome sign.
Although we are still waiting for policies to evolve, the potential now exists to push the trajectory of growth and spending higher. Even the perception of movement becomes movement, boosting interest and perhaps confidence in the meantime. As such, my overall view remains realistic, but cautiously optimistic, barring any exogenous turbulence. I would rather act to increase portfolio valuations for my clients than to run and hide in a completely defensive posture.
Gauge the opportunity.
The biggest question, then, is the timing of more aggressive action, and from which sectors does money have the best probability of generating gains? There is no doubt that we have seen a shift from purely defensive categories into more aggressive opportunities in Technology and Cyclicals. Favoring a strategy of “cautious aggression” I have maintained a neutral weighting in Utilities, while increasing exposure to those companies that demonstrate consistent year-over-year earnings acceleration. This would imply more mature companies that have non-cyclical market share. I also see demographic, long-term shifts in agriculture, water, alternative energy and healthcare equities.
It is imprudent to load-up a portfolio on risk or hunch. As such, I still hold to the belief that one’s asset allocation plays a greater role in the probability of portfolio capital gains than does any individual security within that portfolio. Thus, at the appropriate time, I will rebalance sector weightings, asset allocation, and security selection to enhance portfolio performance.
The key macro factor that needs to reverse, or stabilize, is investor confidence. For too long, many have felt that the game is played unfairly by those who control the capital. A contagion of mistrust arose from that belief and paralyzed the financial markets for five years. Relative and absolute performance diminished during that time and placed all market variables under suspicion. These data interpretations can change, seemingly overnight, and are changing even now for the better. But unless we buy-in to their favorability, the markets will remain inert and range-bound.
Global purchasing is attempting a comeback. Inventories in select industries are expanding. Prices are bullish (inexpensive) and ready for the taking. If banks would start lending, there are dormant industries ready to expand.
The most appealing part of these conversations is that sentiment indicators show that people want to opt back in, not to melt away and forego the whole thing altogether.
That’s enough hopeful empirical evidence, right there.
The information contained herein has been obtained from sources believed to be reliable but is not necessarily complete and it accuracy cannot be guaranteed. It is intended for private informational purposes only. Any opinions expressed are subject to change without notice. Du Pasquier Asset Management and its affiliated companies and/or individuals may from time to time own or have positions in the securities or contrary to the recommendation discussed herein.
(c) du Pasquier Asset Management