How have the markets fared in the first half?
There is a great line in Alan Bennett’s film, The History Boys, about schoolboys preparing for the Oxford and Cambridge examinations in the 1980s. One of the slower pupils says in an enlightened way, “I just don’t get history, it’s just one blinking thing after another…”. Though he doesn’t use the word blinking.
History teaches us a lot about our investments. It may be a few days early to print the 2015 first-half performance but the trends are already set in stone. Past performance may be no guide to future performance but it can give insight into how the markets reacted and to provide a road map for the future.
Currencies always come first – they are the canvass on which our investments are painted. The greenback reigned supreme yet again, smacking the euro down 7 per cent year to date, though in March the common currency was down double that. The yen sunk 3 per cent, the aussie and the Canadian looney took a hit of 6 per cent, and if you are a Kiwi, you don’t want to know.
The Swiss franc took the yellow jersey, being up 7 per cent against the otherwise dominant dollar following their elimination of the soft euro peg. The US dollar and the Chinese yuan followed each other so closely they could have been holding hands.
A Hong Kong (dollar) investor with overseas holdings outside Switzerland faced a painful headwind from currency movements but, on the other hand, this was amply counterbalanced by a very good quarter for shares.
As so often happens, the leaders were markets that had previously taken a beating. The green jersey for major markets goes to China, up a whopping 45 per cent, not surprisingly flirting with volatility in recent weeks. Elsewhere in Asia, Japan sniffed at 20 per cent and Hong Kong finally produced good returns of 16 per cent. Marital discontent broke up the Modi honeymoon as last year’s darling, India, underperformed – up just 1 per cent.
Russia recovered from the shock of sanctions and oil price spills to post a recovery of 22 per cent in dollar terms for 2015, clawing back half of what it lost last year. The smaller European markets were outstanding, as the world became more blasé about Greece leaving the euro. Denmark leapt 30 per cent on the back of Vestas, the wind generation specialists; Novo Nordisk, the inventors and producers of insulin; and Carlsberg, which of course needs no introduction.
Italy and Portugal led the European pack, soaring 23 per cent with the two big markets of Germany and France stamping out 18 per cent returns in the six-month period – much more than making up for the currency losses. Step forward the market holding up the rear, you guessed it, Greece, which lost 5 per cent in euro terms. But it gained 15 per cent last week alone.
Even among the also-rans, records were set. Nasdaq crashed through its stunning all-time record set in the 2000 tech bubble (up 9 per cent). Australia and the UK rose 5 per cent, the S&P languished at plus 3.5 per cent, while Canada nosed above the waterline at 1 per cent.
Brent Oil rose 11.5 per cent (after losing 50 per cent last half year) but elsewhere in the commodity complex, rises were limited, with gold losing 0.7 per cent. Those of you visiting Starbucks or Pacific Coffee for a heart-starter should bear in mind that coffee was down around 20 per cent and sugar by 10 per cent.
Bonds were – for once – not the place to be, with European bonds losing as much as 3 per cent after their flash crash around Easter. A Hong Kong investor in European bonds would have lost nearly 11 per cent if you add in the currency effects. Ouch! Benchmark US 10-year Treasury bonds lost about a per cent.
The year so far has been a period of change; one of recovery of those markets that have underperformed. This rotation into less well-performing assets indicates the maturing of an investment cycle. Typical mid-cycle behaviour would indicate that we are probably not far from a series of events that will cause a sell-off; of maybe 10 per cent. This could be what the volatility on the Shanghai bourse is telling us at the moment.
But deliberate economic recovery continues in the US and Europe and that will drag the rest of world into a further period of growth. A pull-back will allow markets to form a base for another push at the records – and the eventual bubble that ends the cycle.
The old adage of “Sell in May and go away” might more accurately be described as “Sell in June but come back soon”. It is not yet the end of the bull market cycle, not even the end of the beginning, but it might possibly be the beginning of the end.
Richard Harris is chief executive of Port Shelter Investment Management