I walked into the office, turned on my Bloomberg screen and saw the DAX up 26% year-to-date, the 3% MGS 2040s trading close to the €120 level, the EURUSD at $1.06 and the 10-year bund yielding 0.16% (and that is not a typo, I did mean 0.16%)!
Then the phone started ringing. A client is irritated because he saw the markets rally but never had the courage to get in. He is now sitting on €100,000 cash and wants to know if there is still upside from this level. ‘The markets are up 25% in Europe, how do you justify buying at these prices!’ he goes on saying. ‘If only I got exposure to the markets at the start of the year things would be much easier from this point forward because I would have a cushion if things had to turn for the worse. So what do I do?’
Trying to put the client on the right track without making him feel guilty for not having done anything, I explained where we are coming from and where to go from here.
Pause…Rewind….Play
If I had to look back at 2014, technical analysis showed that every time the European Equity markets were in an overbought situation, the prices would correct. Whoever traded the markets made money whereas those who adopted a buy and hold strategy did not make money in Europe. The reason for this was because Europe had no story to tell. Markets were driven by uncertainty and investors got tired of hearing Mario Draghi say ‘We’ll do whatever it takes’ but in reality never do anything.
But things started to change towards the end of 2014 and investors started to actually believe that full blown quantitative easing was actually going to happen in Europe. Investors started picking up stocks and positioning themselves in the markets. To be honest, I was sceptical all along because I never thought the Germans would have let down their guard and accept such a move by the ECB. There were many others who shared the same view.
However, equity prices started to come up at a fast rate. In the first weeks of 2015, we were at a point where it seemed like quantitative easing was going to become a self-fulfilling prophecy. I shuddered to think what would happen if the ECB did not deliver.
Then on 22nd January 2015, the ECB put its money where its mouth was and announced a QE program with the ECB pumping €60bln in European economies each month for the duration of 19-months or till the inflation rate reached the ECB’s target, whichever comes first.
From that day forward, it became a totally different ball game for European equities. For the first time, European investors started to look at the bigger picture for Europe.
Analysts stopped being conservative on their European valuations and started increasing their price targets factoring in better times ahead. The weakness in the oil price was an additional stimulus to the economy as it increased investors’ disposable income.
Say yes to the music
To get straight to the point, the answer is yes. Yes I would buy the DAX even though it rallied 25% up since the start of the year.
Quantitative easing has just started in Europe. It is true that European equities have had a sharp rally since the start of the year but this is just the beginning. It is also true that there are certain stocks which have reached their intrinsic value in a short period of time. However there are others which are still showing a gap between what they are trading at and what in my opinion they are worth.
If you didn’t participate in the markets so far it is useless crying over spilt milk. However, if you remain out of the market you have much more to lose.
Let the music play
Forget the rally in the first quarter of this year. The past is history. Take a five year view. Build a well-diversified portfolio mainly in ETFs and mutual funds and do take additional risks on satellite holdings. However, don’t let the satellites set the tone for the portfolio.
If you do this, I am convinced five years down the line, the 25% gain you missed out on would be forgotten and you’d be worrying about how to spend the profits you would have earned on your investments rather than how to make money.
Mr Camenzuli is investment manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.