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March 30, 2012 7:08 pm
A ripsnorting first quarter is always unnerving. Those who were long equities or short bonds from the start of the year are glowing. More sceptical investors are either feeling very ill indeed or they capitulated in time to catch some of the rally. Many hedge funds sit in the latter category. HFRI’s equity hedge fund index, for example, is up 7 per cent versus global equities’ 12 per cent.
But the first quarter is also the time when most professional money managers bag their bonus from the previous year. Therefore, even those who made a terrible start to 2012 no doubt still feel upbeat enough to make it all back by Christmas. How to achieve this, however, must seem trickier this year than most. The bifurcation of views on the main asset classes is extreme.
Take equities. On the one hand a strategist at Goldman Sachs wrote recently that stocks offer the best buying opportunity “in a generation”. On the other hand, the cyclically adjusted price/earnings ratio of the S&P 500, for example, is about 70 per cent above its average going back to 1900, according to Smithers & Co data. Both can’t be right. It is also true that markets rarely move sideways for long.
The outlook is no clearer for bonds. For sure both sovereign and corporate debt look insanely overpriced, even if you think there is only a slim chance that growth and inflation tick up from here. Indeed, US 10-year yields climbed 50 basis points at one point during the quarter as the economic mood improved. But betting against bonds has turned out badly for as long as investors can remember, and heaps of government, corporate and household debt remain. Can yields really go lower? Look at Japan.
And such confusion before even getting to currencies. Choosing between the euro and the dollar, say, is akin to comparing a three-legged mule and an arthritis-ridden yak. Not that other developed world currencies look much healthier. Best of luck in the second quarter.
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