It is four and a half years since Lehmans collapsed and three and a half since equity markets reached their trough. There is only so much misery that one can take and markets have not been given enough credit for having been determinedly optimistic for much longer than almost anyone has noticed.
It has been a while now since I started to discuss my growing optimism about 2013. Quite rightly I am increasingly being held to account for this. The question most frequently asked is ‘how do we get more cyclicality into our portfolios?’.
In a week where the American Institute of Supply Management surveys took a nice turn for the better and neither the Bank of England nor the European Central Bank saw the need to add extra stimuli, the question is especially timely.
Other than simply raising equity weights, my first tactic would be to put more money into Europe. This has been the least loved part of the world for investors for years.
Perversely it has the greatest potential to recover. European companies sit at ratings notably cheaper than their global peers and traditionally outperform in rising markets. To me the odds favour European out-performance over the coming year, counter-intuitively supported by a firming of the euro against the pound.
Over the past years I have never been shy in expressing my opprobrium towards the banks.
This may be scar tissue left by having twice been employed by one of the UK’s venerable institutions but I hope the reasons were rather better founded than mere revenge. Now, however, the banks may be leopards with different spots.
Central banks have minimised systemic risks and a good number of non-systemic ones too, leaving the outlook one of an improving global economy, exceptionally cheap and available credit combined with (relative to history) exceptionally low valuation of banks’ equity.
It sounds crackerjack but it is possible to argue that the outlook for the banks is rather rosy.
Thus my colours for riding the upcoming cycle would be tacked to the masts of Europe and financials. This is the adventurous route, but I think none the worse for so being.
* Jim Wood-Smith is head of investment strategy at Investec Wealth & Investment