The stock market rally since its lows in early March (up 37% as of May 20th) has now exceeded any previous recorded bear market rally in history, says Guy Monson, Chief Investment Officer of Sarasin Investment Partners. The previous best bear market rally was 35% in 1937, according to Ned Davis Research historical data. The implication therefore is that what we are seeing is the real thing, not a false dawn.
Although we are seeing the first genuinely global recession, the current recovery in forward looking financial markets is very much running true to past form. Extreme spikes in volatility, like the one recorded in December 2008, have always marked the low points in asset classes in the past. The same goes for rock bottom consumer confidence. The liquidity injection overseen by Mr Bernanke is unprecedented and must lead to asset price inflation.
The biggest concern from here will be the living with the consequences of the unprecedented expansion of the State as Government step into the breach to offset the effect of the surging savings rate in the US and the UK. Sarasin separately are launching fully hedged versions of their global equity funds so as to allow sterling investors to take advantage of the typical pattern of pound currency shocks – namely, sharp falls in response to external events (eg 1992 andthe ERM), followed by a gradual recovery over the subsequent 2-3 years. The pound has fallen well to the south of its long run trading range, as well as below purchasing power parity, and therefore can be expected to continue appreciating, notwithstanding the risk of the UK losing its AAA credit rating as a result of its ballooning public debt and massive fiscal deficit.
Sarasin are also marketing a global equity income fund to reflect the fact that, following the disappearance of most financial sector dividends, the UK market’s dividend yield has becoming dangerously concentrated on just a handful of stocks (nearly 40% of the market’s dividend flow stems from just six stocks, BP and Shell, Vodafone, HSBC, Glaxo and AstraZeneca). The much bigger global equity market universe meanwhile has never had so many high yielding stocks to choose from. Sarasin’s fund has a current yield of more than 5.5%.