Sign investors are looking for might be at hand – BJM PCS
No one has yet found a way of perfectly timing the market, but that doesn’t stop investors from trying; and one of the signs they look for may now be at hand.
The tip comes from the indicator-watchers at Barnard Jacobs Mellet Private Client Services (BJM PCS), the company that specialises in wealth planning and asset management services for high net worth individuals.
Louis Bekker, head of BJM’s Multi-Manager business, points out that in March 2009 key signals relating to international risk aversion appeared to be changing following a year of plunging equity values and stalling national economies.
Bekker explains: “During times of economic contraction or deleverage, funding currencies like the Japanese yen and US dollar outperform the currencies of emerging countries, high-yielding bonds – US BBB corporate bonds are an example – and resource stocks.
“During times of growth, high-yielding or risky bonds, emerging markets and commodities tend to outperform low-yielding currencies as investors start seeking higher returns at the cost of more risk.”
It can therefore be illuminating for investors to follow the relationship between the S&P 500, corporate bond spreads, gold and the yen.
“Over the past year, it is no surprise that a number of top-performing fund managers had significant long US dollar, gold and Japanese yen positions,” says Bekker.
“An alternative to holding yen was physical gold, but recent data shows that a hedge position in a physical gold position was not as effective as holding yen.
“It appears that the Yen hedge has run a fair amount of its course and that the time to start to reduce this bet could be at hand.”
This view is supported by a comparison of the credit risk spread between the BBB US corporate bond and US AAA corporate bonds. Recently the spread on BBB credit corporate bonds hit levels last seen in the Great Depression of the 1930s. On the opposite side of the spectrum US government bills and bonds is widely seen as being in a bubble and hold very little value.
However, as Bekker notes, “nothing at this point in time indicates that we are heading for the same economical contraction as was experienced in the 1930s”.
The BJM PCS trend-spotter concludes: “Although corporate risk spread appears to have peaked, fundamentals point to further possible strength in the US dollar and Japanese yen”. Corporate credit spreads must peak before the stock market can start forming a bottom, another key indicator will be international banks. A stable banking system is needed for the market to start forming a bottom; banks lead the market down and will lead the market back.
“The point to switch from a defensive to an attacking game plan could be at hand. Selecting the right asset manager or managers is going to be critical.”
