The trends are clearly changing for markets. What was relevant yesterday for markets is no longer relevant for markets now. You must focus on future trends rather than past trends to position your portfolios.
Markets have changed course in just over a year. Equities from the S&P 500 to the Nifty that were being beaten down in 2011 are looking bullish in 2013. US treasuries that had a long bull run since 2008 are climbing up from the lows.
Gold that was seen as a hedge against market collapse is down from highs seen in 2011. The Japanese yen that was seen as a safe haven currency has lost 15 percent against the dollar from highs seen in 2012. The euro that was threatening to collapse has climbed 8 percent against the dollar from lows seen in 2012. Indian government bonds that were being sold on the back of rising inflating in India in 2011 are now being bought aggressively on hopes of rate cuts.
The trends are clearly changing for markets. What was relevant yesterday for markets is no longer relevant for markets now. You must focus on future trends rather than past trends to position your portfolios. Let us look at some trends that were relevant in the past and are losing their relevance now.
1) Debt: Debt was the biggest issue driving markets a couple of years ago. US debt, eurozone debt, rating downgrades due to high debt, debt default by nations such as Greece and bailouts by the European Union were driving markets.
Debt is slowly losing its relevance as many debt-ridden countries have been bailed out, central banks are pumping in liquidity to keep down bond yields and whatever debt had to be sold by traders and investors has been sold. Debt issues will surface time and again but are unlikely to drive down markets for long periods of time going forward.
2) Currency: Economists at one point of time were sure of the collapse of the dollar while at other points of time were sure of the collapse of the euro. The dollar and euro have not collapsed and are unlikely to collapse going forward. The currencies will appreciate/ depreciate according to market fancies but the value will not diminish to nothing.
3) Inflation: Inflation was seen as unstoppable in emerging markets such as India , China and Brazil but it has now come off from highs seen in 2011. Central banks of India , China and Brazil are loosening monetary policy to spur growth in their countries.
4) Oil: Oil prices were forecast to surge ahead to unsustainable levels of $200/bbl on the back of growing demand in fast growing countries such as India and China . Oil prices are down 30% from highs seen in 2008 and are forecast to trend down on the back of increasing oil production in the US .
The fundamental factors on issues such as debt have not changed much but the fact is that debt is seen manageable now. Similarly latent inflationary pressures exist in emerging markets while there is a case of sharp devaluation of currencies on the back of central banks pumping in money into the system. However, central bank balance sheets are not seen as destabilising currencies in the near future. Oil is definitely not seen as a threat any longer on the back of the shale gas revolution in the US .
Position your portfolio based on what can drive markets going forward and not on what drove markets in the past….
-Umesh Shanmugam