Should investors be worrying that a bear market is about to descend on us?

The big disconnect today is between the undoubted geopolitical stresses round the world and markets still hovering at close to record levels.  A number of investors whom I greatly respect have in recent weeks told me they believe that the next market movement has to be downwards.  Valuations of many asset classes are higher than has ever been sustained for long, central banks are loudly announcing their intention to withdraw the monetary stimulus we are hooked on and, although economic growth seems to be stable, there is no shortage of things to worry about.  And yet, unless there is a major geopolitical or financial 'event' to cause a crash in investor confidence, I am not sure we are on the brink of  a bear market.  It will come eventually, I agree, but I'm only seeing trouble ahead in the distance. There is no doubt that investors are holding high levels of cash, which suggests that buyers will come in if there is a price dip.  And our friends at CrossBorder's end-September liquidity data does not suggest anything disastrous is about to happen.  Yes, global levels are below average and the US, in particular, is looking vulnerable.  On the other hand Europe and the UK are seeing strong liquidity flows, and China and Emerging Markets, while lower than recently, are still high.  CrossBorder (the clue is in the name!) pay close attention to cross border flows because a sharp fall in them is often the harbinger of a market fall.  These are currently at all time highs, which means there is only way they can go, but we aren't seeing falls yet.  I also note that bond markets and volatility indices, both usually leading indicators of trouble ahead, are calm. With the remains of hurricane Ophelia approaching Ireland, I am aware of the danger of repeating Michael Fish's claim to fame when I suggest that a bear market is not about to descend on us.  Markets will fall one day: that is certain.  My point is that, unless there is an obvious event which causes investors' risk appetite to nosedive,  I believe we are still several quarters, and possibly years, away.      If you would like to purchase CrossBorder's latest major markets update with end September liquidity and cross border flows data, please find out more here. β€‹

William Bourne attends the 15th Annual Local Government Pension Investment Forum

On 11th October 2017, William Bourne attended the 15th Annual Local Government Pension Investment Forum in London. 

William Bourne attends Invesco investment discussion dinner

On 4th October 2017 William Bourne attended the Invesco investment discussion dinner in London.

What are the prospects for gold?

Gold has not been particularly fashionable as an investment since the heady days of 2013 when the price reached nearly US$2,000 per ounce.  The undoubted heightening of political risk (think superpower jostling, demographic challenges, European constitutional uncertainty and terrorism) might lead one to expect the price to approach that level again.  It has risen about 25% from its low in late 2015, but either investors are not worried by events or they do not see gold as the ‘go to’ safe haven. We like to think of gold as being a measure of the overall demand for fiat money, almost the inverse of its price.  The price of paper money increases if investors are confident enough to want to invest more (ie. demand rises) and goes down if central banks print more (ie. supply rises).  Demand for gold - whether bullion, jewellery or whatever - is simply the other side of that economic equation. It is gratifying that the data from our friends at CrossBorder Capital backs this up.  They measure the price of gold inverted against net demand for paper money and there is a strong correlation between the two.  No surprises that is the case during QE2; however the measure has picked up most of the major changes since the 1980s.   Today the data signals limited upside for gold, which should not be much of a surprise given that at least some of the central banks are beginning to withdraw QE.  Of course, there is always a case for holding gold as insurance against a major geo-political crisis but we would suggest there is likely to be an opportunity cost attached. For more on Linchpin IFM and asset allocation please click here.​

Upcoming events

Please find below a selection of upcoming events William will be attending:  13th October 2017 - Fidelity UK institutional conference, London 23rd November 2017 - SPS Spotlight Series - LGPS in Flux - Investment Issues and Solutions, London       

William Bourne attends Lazard Briefing Series

On 29th September 2017, William Bourne attended the Lazard Briefing Series - 'Can emerging markets continue their blistering run?' - in London.

William Bourne attends Jupiter institutional investor lunch

​On 28th September 2017, William Bourne attended the Jupiter institutional investor lunch in London.

Advisers or advisors?

The requirements of MIFID2 are now centre screen for firms on all sides of the asset management industry.  The newspaper headlines focus on the requirement to unbundle and pay separately for research, but for LGPS Funds the categorisation by default as retail clients has caused the most angst.  Most, if not all, will wish to ‘opt up’ to professional status, so that they can continue to invest in lower fee vehicles.   After many months and heavyweight representations to the FCA, there is now a template which they can complete to ask fund managers to opt them up, which contains both quantitative and qualitative criteria.  The latter are intended to ensure that there is sufficient expertise present that the client can understand the advice and information given by the fund manager. As always with something done in a hurry against a deadline, in this case 3rd January 2018, there are some anomalies and unintended consequences.  The first question is who needs to opt LGPS funds up.  Managers do, of course, but what about consultants and advisers?  In theory any firm or individual providing regulated advice (FCA definition) on specified investments should do so.  As pool subfunds will be included in this definition, and individual LGPS Funds will continue after pooling to be responsible for allocating between them, there is a clear argument to say that any entity assisting them with advice in this area needs to be FCA regulated and to opt their clients up.  However, asset allocation and general advice are not regulated activities, and the funds’ investment activities are, according to the guidance on pooling provided by the Government, explicitly restricted to asset allocation.  Which suggests that there is no need.Despite the arguments both ways, the direction of travel is fairly clear and I would expect anyone providing specific advice on individual subfunds - as opposed to commenting on, for example, an investment consultant or pool’s choice of them - to end up requiring to be FCA regulated, and having to opt his/her client up.  Personally, I am going to rely on the wording in my contract which defines my duties as providing ‘general’ advice. To confuse matters further, what the industry knows as the consultant is the adviser from the template’s perspective and vice versa.  This is because it refers to the entity advising the firm on its Investment Strategy Statement (ie. ‘advising’ as per the LGPS regulations and not in the FCA meaning of the word).  Where both investment consultant and independent adviser are present, that will be the former, so the latter has to be put down as consultant. Then there are the qualitative criteria, such as longevity of tenure.  An Officer at one of my clients has 38 years in post and we are joking that MIFID2’s requirements mean he will not be allowed to retire because they need to keep the average years of experience up.  There’s also the form’s usage of the American ‘advisor’, whereas my LGPS contracts use the English form ‘adviser’.   I could go on and on, but I have to go and feed my dog her morning meal.  I must be careful not to get the MIFID2 ‘opt up’ process muddled up with what I normally give her!