Last year turned out to be one of pleasing progress. Generally favourable economic conditions, mirro...
Last year turned out to be one of pleasing progress. Generally favourable economic conditions, mirrored by the mid-cycle corporate recovery, were more than enough to offset the challenges of a sharp decline in the dollar and a sustained rise in energy prices.
It was also a year of some real surprises - very rarely do short rates advance with a consequent fall at the long end. That is what occurred in the US and was one of the reasons that the 'alternatives' endured such a torrid time midway through the year. Fortunately, the fourth quarter provided a strong recovery, as significantly more trend and volatility returned to the market.
2005 has, on the whole, started quite encouragingly and even those global macro managers that suffered a sharp rise in the dollar in January - if they continued their short positions - look a good deal happier now.
Two other trends seem to be emerging from 2004. First, hedge funds are taking over some of the roles of investment banks due to the much heightened activity in the merger and acquisition arena, which will probably add to greater volatility in the sector. Secondly, the evidence grows that it may be that a melange of high return, high volatility alternates, which are not correlated, do an interesting job within the strategy.
If I did not know already, the evidence is clear that successful fund of fund managers should stick to the winners, get to know them even better and make sure they have capacity.
Probably to many peoples' surprise, long equities ended up where one might expect, given the general gains in corporate profits and dividend increases. I say 'surprise' because, quite understandably, many investors have not forgotten the ravages of 2000, 2001 and 2002, and equities seem to advance on a wall of perpetual angst.
I hope we will enjoy the same angst for much of 2005. Normally, at this time of the cycle 'growth' is more rewarded than 'value' and large caps recover a relative advantage, but with the flurry of global mergers anticipated, the buyers are sure to look to 'value' as well.
The long-term secular demand for energy is not in dispute, nor the fact that for most of the last decade there was a quite serious disinclination to look for reserves in 'safe' waters. Investors should recognise this has changed and that it affords particularly interesting opportunities in the US and Canada.
2005 may be another mid-cycle year where there will be advances but not without periods of quite serious reflection. With all pilgrims' progress, the key is to be enriched from the lessons of the journey: liquidity is good, the global economy is growing, generally at trend or above it, corporations are making good money and astute investors will be able to do the same.
What made financial headlines over the weekend?
Vitality at Work scheme
Reporting to Steve Hill
Appointed on 19 September