Easter Résumé

After the previous week's shake-out, sentiment improved ahead of the Easter break, the Vix fell, and the yield curve steepened slightly leading to equity markets recovering some of the recent losses. The Nasdaq index, which had been the focus of much of the equity market anxiety in the past few weeks, rose just over 1%. A combination of the earnings season producing no real negative surprises, reassuring macro news and progress over the Ukraine comforted investors. The recent unease has led to bonds attracting new money in favour of equities, according to funds flow data. The weekly AAII investor sentiment index also continues to show an increase in bearish sentiment. The continued speculation that the ECB will soon cut interest rates to zero (Frank Investments believe this will happen at the next meeting on May 8th) saw Italian 10-year bond yields fall to their lowest level for the past 70 years. 

After the long weekend, UK Equities may well be boosted again when trading resumes on Tuesday after a press report that Astra Zeneca could be the subject of an offer from the US pharmaceutical company, Pfizer. As well as boosting Astra Zeneca, speculation may well refocus on some of the other UK stocks linked with takeover speculation in the past.  

After the recent shake-out in the technology sector leading to some of the much sought after (at the time) initial public offerings trading below issue price, enthusiasm for further deals is waning according to the Wall Street Journal. Dealogic, a specialist independent research house, recently pointed out that the total value of new companies being listed is the highest since 2008. 

The recent correction that has seen a 10% fall in the Nasdaq, has also seen a change in investor strategy moving away from growth to value. Investment managers are often defined as “value” or “growth” style investors. Growth companies have higher ratings due to their perceived higher growth rate; trouble comes when the growth expectations are not met. Facebook would be considered a growth stock. Value stocks are those that are lower priced than the market and for some reason are out of favour with investors. People who buy value stocks hope that the management team can unlock that value. Tesco may be considered a value stock, which value focussed portfolio managers buy in the belief that a management team could be put in place to revitalise the company’s prospects. Put into footballing terms, Liverpool over the past few years would have been considered a value stock, Manchester United a growth stock. One can see as the football season comes to an end how quickly sentiment can change. 

A growth investor will look at Tesco and decide there has been a fundamental change in the retailing landscape and Tesco's day is done. Growth investors only buy when they see a change in strategy that produces earnings momentum. Value investing requires patience, but can be rewarding in the long term; growth investing is much more focussed on impetus.


Posted on April 22, 2014 .