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Be bullish after a 'blah' year, urges Ken Fisher
By Ken Fisher | Thu, 7th January 2016 - 13:32
Occasional flat years are normal during bull markets - pauses that reset sentiment, preventing runaway optimism. Big returns often follow. The MSCI UK's 1.8% slide in 2011 preceded double-digit gains in 2012 and 2013. The 1990s bull paused in 1994, when the MSCI UK fell 6.97%, but UK stocks did great the next five years. The MSCI UK rose just 4.0% in 1976, but soared in 1977 - up 41.6%. With a strong economy and bullish political gridlock reducing legislative risk, Britain could easily roar back in 2016.
Global diversification is necessary
"Global markets have real upside potential. Big returns after flattish years are a global phenomenon."But don't overconcentrate. Global diversification is necessary. While UK stocks fell a bit last year, world stocks rose 4.9% - still flattish, but better. Britain is just 7.4% of global developed markets. If your equity allocation is UK-focused, you're missing over 90% of the developed world - adding volatility and risk that presumes Britain will be fine but the rest of the world won't.
You also take big sector risks. Relative to the MSCI World, UK markets are overexposed to Energy and Materials, modestly overweight Financials and woefully underexposed to Technology. Energy and Materials are 10.5% of the MSCI World but a whopping 17.4% of the MSCI UK. Tech is 14.2% of the MSCI World but only 1.5% of the MSCI UK.
Hence owning Britain only is a bet on commodities and against Tech - at a time when commodity producers are bleeding and Tech is outperforming. Overweight Britain if you think it will do well, but only by a few percent, with choosy sector picking. Right now, my UK exposure is mostly big banks and drugs.
Global markets have real upside potential. Big returns after flattish years are a global phenomenon. Measured in sterling, world stocks fell -4.8% in 2011, but rose double digits in 2012, 2013 and 2014. The MSCI World paused twice in the 1990s bull without ending the party. The first pause, 1994's -0.6% drop, preceded 1995's 21.7% rise. After the second pause, 1996's 3.0% gain, world returns topped 20% for three straight years. Stretch back to 1948 using the S&P 500, and we've had 12 flattish years (returns between -5% and 5%). The next year was positive 10 of 12 times. Nine of those ten years rose double digits.
"There is strong potential for a great 2016. Whether we get one likely hinges on sentiment."Of course, a flattish 2015 doesn't dictate a big 2016. Stocks move on fundamentals - the gap between sentiment and reality - not past performance. But there is fundamental precedent for a great year. Seven years into this bull market, economic and political drivers look good, while sentiment is stubbornly skeptical with room to rise. Sir John Templeton famously said, "Bull markets are born on pessimism, grow on scepticism, mature on optimism and die on euphoria." We're in a long, slow grind to bull market maturity.
Bull markets often accelerate as they age. Usually, bull markets are steepest during the first third, flattest in the middle third, and steep again in the final third. Not every time, but more often than not. Of the S&P 500's 12 full bull markets since 1932, 10 accelerated in the final third. If you aggregate all 12 bulls, the median generates 48% of the bull's total return during the first third, 16% during the middle third and 36% during the final third. As this bull's quest to be the longest-ever grinds on, we could be entering that relatively steep final phase-and it could last a while.
2016 still a year to own stocks
So there is strong potential for a great 2016. Whether we get one likely hinges on sentiment. Strong late-bull returns usually feature ascending confidence. Investors get over their fears, become increasingly optimistic and happily bid stocks higher. If good news makes folks feel great, stocks could soar. If dogged scepticism persists, it could dampen nearer-term returns, ultimately making the rest of this bull a longer, slower grind.
"Headline-hogging negatives generally don't cause bear markets. The unseen wallops are the real culprit"But whether 2016 is great or just ok, it's still a year to own stocks. There is always something to worry about, but unless you know something others don't, you shouldn't flee. Markets pre-price widely known risks. Headline-hogging negatives generally don't cause bear markets. The unseen wallops are the real culprit, and right now it is difficult to see anything that coincides with a bull market's end. Sentiment isn't euphoric or even complacent. None of today's un-discussed risks are likely to whack trillions from global GDP. Unless there is a reason to be bearish, be bullish.
As bulls mature I like high-quality big stocks with relatively predictable earnings streams. Here are two:
Visa (V) isn't cheap but at 30 is about half the trailing price/earnings (PE) ratio it sported in April 2013 - at 50% of today's price. It has been a pretty smooth ride and likely will be in 2016. As the world's dominant electronic-payments firm, it's more of a tech play than its official "financial services" designation. As peers struggle, Visa dons a halo outshining most major US firms. I bet that halo brightens as long as this bull market does.
The UK often provides sneak previews of US financial phenomena (and vice versa). Both operate more similarly than either fathoms. To me, the ending of Britain's "stronger bank balance sheets at any cost" policy foretells a similar loosening of American loan-growth constraints - and increased earnings. Hence Bank of America (BAC) should positively surprise, ending its sideways wiggles. It's our overall best-postured big retail bank, yet sells at 11 times my 2016 estimate.
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.