The Difficulties of Market Timing

  • Date: 11/02/2015

Ah, the difficulties of market timing…

A well known fund manager, Crispin Odey, was quoted recently as saying the developed world is on the brink of a downturn that will be ‘remembered for a century’, and that ‘equity markets will get devastated’. He concludes: ‘If economic activity falters there will be a painful round of debt default.’

Funny that, because I thought we’d just been through a downturn that will be remembered in a century. We surely can’t be on for a new one so soon after the last!

The comments highlight the problems of market timing. Mr Odey could be right, in which case a sensible approach would be to sell shares, and reinvest in cash, or government bonds, and wait. On the other hand, he could be wrong, in which case one’s portfolio earns very little while one awaits the anticipated Armageddon.

If the recession and stock market falls materialise, one looks like a hero. If not, one has to accept negligible returns, and, if an investment manager, pen letters on the lines of ‘returns have been a little disappointing this quarter after we took a more cautious approach...’

If wrong, one also has to pay all the dealing costs of getting reinvested again.

It’s worth pointing out that the asset allocation decision (whether to invest in bonds, equities or cash) has become more complex since the financial crisis. Previously, one could choose to sit out any periods of turbulence by parking money in cash for a 5% return. Those days have long gone.

There are certainly plenty of things to worry about. Economic momentum, which was picking up well in 2013, has been declining. ‘Deflation’, or falling prices, seems likely in the Eurozone, at least in the first half of this year. And we have the possibility of a ‘Grexit’, or Greek exit, from the Euro following the recent election of the left-wing Syriza party.

The current political and economic situation in the Eurozone has reminiscences of the fabled ‘Schleswig-Holstein question’ of the nineteenth century (a dispute between Denmark, Prussia and Austria over the status of these territories). This was apparently so complex that only three people understood it, and of these, ‘one was dead, one had gone mad, and the other had forgotten the answer.’

Greece’s position is equally complex. The new government is negotiating for a 50% reduction in its debts, as well as an end to ‘austerity’. The creditor nations, (the Eurozone countries and the IMF, which bailed Greece out to the tune of €240bn in 2010 and 2012) are refusing to budge, fearing that any write-down will encourage other nations, like Oliver Twist, to start asking for ‘more debt forgiveness’.

Total Greek debt is €317bn and is expected to peak at 175% of GDP. This is very high. But the interest cost after the resetting of coupons is low (nominally 4% of GDP, but 2.6% after loan interest is rebated by the ECB). And the Greek economy is growing again after bottoming 18 months ago.

The last bail-out programme ends on February 28th. If it doesn’t negotiate a new programme Greece is unlikely to repay maturing bonds after that, given its lack of access to markets. If it isn’t in a bail-out programme, that jeopardises the liquidity extended by the ECB to the Greek banks (on which they are currently dependent).

The two sides are currently in a stand-off, seemingly irreconcilable. The longer it goes on, the more it endangers the Greek recovery, due to confidence and investment effects. However, it seems likely that both sides will be adult enough to come to an agreement. This would probably involve further real terms cuts in the value of Greek debt, while the ECB continues to find some way of financing the Greek banks.

Other than Greece,  we still have weak global growth and the deflationary impact of the oil price to contend with, but the evidence isn’t conclusive that the next bear market is imminent.

Author: James Penn, Senior Portfolio Manager

The opinions stated are those of the author and should not be taken as investment advice.  Any recommendations may not be suitable for all, so please contact your financial adviser for further guidance.  The value of investments can go down as well as up.