Investing is sometimes about being in the right place at the right time. This is especially true for those equity investors that are not strictly in for the very long term, enjoy following their investments and partake in the occasional trade.
In the past two years timely investment in the equity market led to handsome returns. These returns were especially attractive if through opportune advice or sheer good luck investors happened to sail right in front of the wind. Some of the most blatant are the following;
US Quantitative Easing
In late November 2008, the US Federal Reserve started buying massive amounts of mortgage-backed securities reaching a peak of $2.1 trillion in June 2010. During this period the US equity market rallied more than 35 per cent.
As if this was not enough, in November 2010, the US Fed announced a second round of QE adding a further $600 billion to asset purchases. A third round of QE was announced on September 13, 2012. The period between QE2 and QE3 saw US equities increase by over 16 per cent.
The third round of QE, announced in September 2012, launched a $40 billion per month open-ended bond purchasing programme. Investors who missed out of QE1 and QE2 were given another chance. Purchases were finally halted in October 2014. By this time Equites had increased by more than 38 per cent.
Between the end of 2008 and the end of 2014 US equities, supported throughout by QE, increased by over 140 per cent. Furthermore, European investors saw a further 20 per cent gain in the period from exchange rate movements.
European Quantitative Easing
Following months of anticipation by the markets, Mario Draghi, president of the European Central Bank, announced an ‘expanded asset purchase programme’, whereby €60 billion of euro-area bonds would be purchased each month by local Central Banks. Within a few days the European Equity Market was up 10 per cent. By the end of March the market was up 20 per cent. The programme is ongoing.
Dollar Rally
With the US economy outperforming other global economies and the US Fed starting to lean towards tightening policy just as Europe and Japan starting thinking about going in the opposite direction created a massive divergence that could only be translated in a stronger US dollar. From the beginning of May 2014 to date the US dollar has increased by over 20 percent in value meaning that any US assets held during the period have appreciated by the same amount.
Sterling Rally
A Rally similar to that of the US dollar has resulted in a 20 per cent appreciating of the sterling over a two-year period.
Grexit
Market turmoil creates opportunities for the risk minded. The months leading to the eventual capitulation of the Greek government to bailout demands was characterised by short periods of hope and short periods of hopelessness. Rumours became the order to the day and markets changed direction wildly. The market bounced back strongly once it became evident that Greece had accepted the bailout conditions. Over a few days European Markets increase by over 10 per cent.
What next?
European QE still provides support for European Equities and will continue to do so at least until June 2016. The summer months will probably be calm, however, another strong bout of QE is expected from September onwards. Further monetary expansion may be possible if peripheral countries fail to recover. Lacklustre second quarter earnings are expected, presenting possible buying opportunities.
Commodity markets keep selling off. The turning point will probably occur when there is more clarity on global growth. Demand for commodities remains at the mercy of a weak global economic recovery, therefore reducing the urgency to take positions immediately. Gold will be particularly interesting to watch.
China is another contender for the next best opportunity. Much depends on the central government’s willingness to support the economy and its ability to win back trust of major market players. Recent efforts to sustain equity markets managed to reduce market volatility, but in the process also managed to scare off potential investors. Convincing large players to re-enter the market will be more difficult next time round. However, a rebound is already taking place, albeit fundamentals are not convincing yet.
Disclaimer: This article was issued by Antoine Briffa, 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. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.