Every now and again a financial journalist hits on a really good theme, in the Sunday Telegraph Tom Stevenson reported on how there is a lack of diversity in views amongst analysts. The first consensus view Mr Stevenson draws attention to, is that despite all the efforts of central banks, inflation is to all intense a thing of the past. The second, the ECB and Federal Reserve monetary policies will diverge as the Fed starts to raise rates and the ECB continues to stimulate the economy. Bearish sentiment towards commodities and emerging markets is abundant, certainly amongst fund managers in particular. Finally, investors will continue to look for income, keeping them further up the risk curve. We would add focus amongst investors is consensual, China growth, US interest rates and Europe.
There also appears to have been a consensus in asset allocation this year amongst sectors. If we use the Merrill Lynch fund manager survey as our guide. Discretionary, tech and European equities have been over owned, with material and oil under owned relative to history. Fund managers are slightly overweight equities relative to history but continue to hold higher levels than normal in cash.
Where we would argue opinion has been divided and remains so, in our view, is the outlook for equity and bond markets in the coming year. We would also suggest this has been the case for most of the past few years. The bears continue to argue that equities have been driven higher by cheap money and a lack of alternative, the bulls believe that modest growth low inflation will continue to be enough to fuel the bull market. Bonds likewise, the bulls argue that inflation is dead and equities are too risky, the bears argue that eventually all this bank money will enter the economy and inflation will resurface.
Warren Buffet’s mantra is buy when everyone says sell and vice versa. It is what you are taught at investment school, be a contrarian that’s the way to make true rewards. Being a contrarian, is by its very nature a lonely place, you are running away from the herd. It can take time for others to follow your lead, carrying those colleagues can be tough.
If only Mr Stevenson could tell us what the consensus view was for equity prices were, it would be most helpful, at least we could decide if we want to be a contrarian. The consensus view feels almost; we just don’t have a clue. The same could be asked of bond markets.
One view that gets more consensual as the months go by is the bearish view on resources, as a lack of growth and over supply will keep prices down for a long time to come. As governments continue to try and devalue paper money owning real assets must one may come back into fashion, that currently feels non-consensual.