The lack of visibility and uncertainty that have characterised the markets for the past three year...
The lack of visibility and uncertainty that have characterised the markets for the past three years seem likely to remain with us for a while longer. The situation in the Middle East is likely to continue to cast a shadow over markets in the short term.
The Iraqi situation aside, the whole stability of the region remains a concern, as does the threat of renewed terrorist activity, meaning the geopolitical situation will continue to remain a source of uncertainty for a while.
If that were not enough to cast a shadow over the markets, then economic data from both the US and Europe has certainly not given any scope for much optimism. Most data is still showing the major economies struggling to grow at any meaningful rate.
Unemployment seems to be creeping up, growth is anaemic at best and, overall, we still seem to be suffering from the effects of excessive expenditure by both corporations and households at the end of the 1990s, brought about by cheap capital.
In the US, the Fed is running out of rate cut ammunition and although the ECB still has plenty of scope to lower rates, the main concern over Europe continues to be inherent structural rigidities and the slow pace of reform.
It should therefore come as no surprise that the markets are behaving erratically and showing little sense of direction, with any rallies being swiftly followed by profit-taking, but with the trend continuing lower. This is largely a function of the poor liquidity that has been a characteristic of this market for some time.
The high price of gold and oil, and the performance of bonds, testify to the risk-aversion in the markets at the moment, and the general disillusionment with equities as an asset class.
Markets overshoot both on the down and upsides, so as the gloom deepens there is the distinct possibility we may be at the bottom, or close to it. The bigger question remains whether we are yet in a position to move higher or whether markets will more likely edge sideways until the outlook improves.
Historically, in times of risk aversion, small and mid-cap stock have tended to lag their large-cap peers as investors scramble to the perceived safety of more liquid blue chips. Since the onset of the bear market, however, small and mid-cap stocks have enjoyed something of a renaissance, as investors looked far and wide for new ideas, desperate to find new sources of performance.
Investors are now focusing more on fundamentals and stock specifics, leaving behind the big themes and sector plays of previous years. This greater focus on the bottom-up side invariably favours the small and mid-cap sector. Invariably, there will be periods when small and mid-caps underperform their large-cap peers.
When markets stage a short rebound rally, as they did in October last year, small and mid-cap stocks can get left behind. However, we still believe small and mid-cap stocks should provide greater scope for outperformance over the longer term.
The universe of potential investments is immense and still under-researched. This relative inefficiency continues to offer greater investment opportunities.
Markets probably close to the bottom.
Valuations providing more opportunities.
Small & mid caps likely to outperform.
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