This week we are looking at the strategic multi currency economic outlook developed by Jyske Bank’s Strategy and Research Team to get a better grasp on multi currency equity values as they develop.
Equity investors should always look for value because market timing does not work. The chart below convinced me of this fact many years ago that trying to decide when the market is going to rise or fall is not much better than playing roulette where the odds of winning are about 36 to 1.
This chart reflects a 1993 study by Ibbotson and shows how from 1926 to 1993 (804 months) equities dramatically appreciated more than treasury bills. Yet if you deducted the best 30 months of equity appreciation in that 804 months the equities performed worse than treasury bills.
All the extra growth above low treasury bill rates over 67 years was earned in just 30 months. That gives us about a 1 in 27 chance of “guessing” correctly. I say “guess” because after 40 years of being involved in equity markets, I have learned that there is always something we do not know!
Plus I would be willing to bet that most of those months that had extraordinary growth came right after a period when shares performed badly…the time when investors least expected this growth.
Equity markets rarely shout, “hey I have been bad. Now I am going to catch up.”
Value investors however catch this growth, in a way accidentally, in the process of searching for value.
So if we can guess what direction the economy is headed we can better understand value. If we better understand equity values, we are more likely to be invested during times of extraordinary growth.
Value investors will tend to buy more when markets are weak and sell more when markets are overheated. This makes it more likely for them to catch the big moves (and take advantage of them).
Here is the Jyske Bank Strategy and Research Team’s analysis of the US economy in the months ahead.
“We now expect that US economic growth will begin to increase at about the turn of the year instead of in the autumn as expected before. In the meantime, there are prospects of recession. It seems that, over the coming months, inflation will be a smaller problem due to falling commodity prices (energy and food). Falling inflation and rising unemployment will pave the way for a couple of interest-rate cuts on the part of the Fed.
The expected upswing has been postponed due to a mix of rising mortgage rates, higher energy and food prices, continuing strong financial turmoil and the fact that consumers have utilized a larger proportion of the tax cuts than expected. In Q2, GDP growth was quite solid, due to stronger personal spending, among other things, than we originally expected. It seems that the consumers have spent a larger proportion of the tax cuts than expected, but since July no more tax cheques have been issued and that will affect personal spending in H2.
Generally, the consumers are still facing stormy weather even though the storm has weakened a bit. The headwinds are in the form of falling employment, rising unemployment, lower housing prices, an increasing number facing payment problems and problems obtaining bank loans. The consumers have been severely affected by considerably increases in energy and food prices, yet as these prices have fallen, the pressure has weakened a bit. The nervousness on the part of the consumers is reflected in steeply falling car sales over the past couple of months.
It seems that, over the coming months, inflation will be a smaller problem due to falling commodity prices (energy and food). Falling inflation and rising unemployment will pave the way for a couple of interest-rate cuts on the part of the Fed.
Mortgage rates have increased since the beginning of the year in the wake of the turmoil in the mortgage-credit market. Together with continuing strong tightening of the banks’ credit conditions vis-à-vis home owners in particular, this will put a damper on the demand for houses and thus delay the expected stabilisation in residential construction till Q4 2008.
On the whole, we expect that H2 growth will be negative and that the cyclical development will bottom out in Q4 and increase in the course of 2009. The biggest risk facing the economy is still the development of house prices and the ensuing losses in the banking sector.
The decline in commodity prices for energy and food will result in falling inflation rates over the coming months. Core inflation will also come under pressure due to a slowdown in wage increases, weak demand in H2 and reasonable productivity growth.
Weak growth over the remainder of the year will add further to the unemployment. We expect that the unemployment rate will rise from the current 5.7% to 6% at the end of 2008, while also for some time into 2009 there is a risk of rising unemployment.
The mix of falling inflation and rising unemployment will add to the pressure on the Fed to lower its interest rate and we expect interest-rate cuts of 0.25 percentage point in Q4 2008 and in Q1 2009.
A weak economy is likely to improve equity values and create bargains. We look at specific recommendations in our Multi Currency Portfolio Course.
Tomorrow’s message looks at the Euro Block Economy
Until then good global investing.
Join me and Thomas Fischer from Jyske Global Asset Management in North Carolina to learn more about economic trends.
We’ll have lunch at the farm and enjoy the leaf change.
This is the most beautiful time of the year on the Blue Ridge.