Gerrit Smit, head of equity management at Stonehage Fleming, told Portfolio Adviser recently that the issue of fundamentals, and whether or not markets are being driven by them or by macro factors is in itself fairly cyclical.
“We are currently in that phase where the market is concerned with short term issues. For example if one looks at the spread between the S&P 500 dividend yield and the 10 year government bond yield there is a spread of around 40 basis points in favour of the dividend; we are not supposed to get that. That is extraordinary.”
For Neil Veitch, manager of the SVM World Equity Fund, the question is less about the difference between macro and fundamental drivers and more about whether or not the technological disruption seen across many industries means the longer term trend toward mean reversion is as strong as it once was.
As a result of this, he said, it has become harder to value the companies involved. Not, just because historical valuations are of less use but also because many of the disruptors have unproven business models.
“It is not hard to figure out who the winners are going to be but it is difficult to figure out what to pay for it,” he said, adding: “The difficulty is getting the timing right and who the losers are going to be.”
It is clearly a challenging time to be an investor. Not only has the world changed, but there are few things that are cheap and there is no guarantee that the remaining pockets of value don’t have holes in them. The key is figuring out what if any constants remain and how best to focus on them.
For both Veitch and Smit, one of the few constants remains good management. Indeed, Veitch says, given the macro environment, a lot of the return is going to come from backing the right management.
For others it could be as simple as keeping one’s head down and waiting until the dust settles and the fundamentals reassert themselves. But, whatever route you take, it is probably worth tempering your expectations, because some parts of the old days will not have been brought along for the ride.
