Stockpiling fuel in November: Very familiar. This time last year it was the Millennium Bug that had ...
Stockpiling fuel in November: Very familiar. This time last year it was the Millennium Bug that had put the frighteners on half the population.
The prudent or paranoid were laying in fuel, food supplies, fresh water containers and oiling the cogs on their bicycles in preparation for the economic and social collapse expected to accompany the date changeover on 1 January.
Even central bankers got a little nervous and pumped more liquidity into the financial systems to ensure that everyone had a comforting amount of cash in their pockets, and forestalling more widespread panic. Of course, when no crisis materialised, investors suddenly felt very flush and, Christmas already over, looked to the stock market as a place to spend their money.
So for the first quarter of this year markets roared away. Any dullard had only to actually invest to see his "strategy" yield handsome rewards in a very short period of time. Like beginners luck at the card table, many got the impression that the game was ridiculously easy, and doubled their stakes. Some were honest enough to call it greed, but the market preferred to call the goldrush "momentum investing".
That description devalued what was once a perfectly respectable investment style. What has happened in the last two quarters, subsequent to the inevitable correction in March, has less to do with momentum, riding rising trends, than market cowboys chasing bandwagons. However, the image of the investment industry requires that even such haphazard activity is given a title.
So now we are hearing all about "style rotation". Pure growth managers who did very well out of the TMT bubble jumped ship and clambered about the good ship Value for a while. But when returns did not arrive with the swiftness they have come to expect, they dived back into the increasingly choppy waters of the market to pursue Growth At A Reasonable Price.
Style rotation is only part of the frantic search for direction at the moment. There is also sector rotation. Once TMT stocks hit trouble, first among the dot.coms and then among the telecoms, investors sensibly decided to go more defensive. This briefly favoured consumer cyclicals and companies in areas like construction, retailing, food businesses, leisure and with some qualifications, financials.
But in between there was the rapid rise and fall of pharmaceutical and biotech stocks. Around August marketing departments moved into overdrive with big mailings of leaflets on healthcare funds. The unwary or badly advised could have switched in and out of at least three or four different sectors and styles this year.
Portfolio churning among professional investors is illegal. But there is nothing to prevent retail investors trading their portfolios like dervishes. Stories of the wealth generated by day traders are a powerful driver, and if an investment idea doesn't bear fruit quickly it is ditched for the next one.
But while trading activity is increasing, market liquidity is decreasing, and unlike last year, the central banks are not about to open the money taps. Style rotation is causing significant stock concentration and over the past year bid/offer spreads have been widening in most major markets.
The change has been greatest in the UK, where the spread has doubled. The lesson is to choose holdings carefully, because while it is still possible to get into the market, exiting when you want to is getting harder.
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