A Glorious Time to Enjoy Risk Assets...

Dear Reader,

Well, it looks like we passed 1,200 on the S&P 500, the FTSE 100 passed 5,800 and just about every equity market is rallying, presumably because investors have decided that central banks will try and inflate asset prices to help boost "consumer confidence".

Many of you have increased equity exposure to 40%, a suitable exposure to this asset class at the moment. I must admit, personally, I am starting to put on my selling hat. We suggest you consider getting that hat out of the cupboard and dusting it off.

Though recent news is a powerful boost to asset prices, we seriously doubt pumping asset prices with morphine (i.e. increasing the price of a piece of paper), will be the long term solution to slow growth in developed economies. These are structural problems that depend on the cost of labour, the skills of a countries people (i.e. education, attitude etc) and their demographics. The debt burden is of course an important issue. As a consequence, the role of morphine is most uncertain.

Investors are suggesting enjoy the party, don't fight the FED, overload on risk assets. In the short term, this may well prove to be the most lucrative strategy. However, we express a sound of caution. It is a probable event that the drop will be faster than the rise if:-

1. The last drop of morphine is injected and their has been no "perceived positive outcome". Furthermore, It still is not clear to me what the criteria is to deem the project a success

2. Your body has after effects on the morphine....inflation...other central banks react....

3. You become addicted.............Markets drop unless QE keeps continuing...


The environment is being created where speculation is the game, not investment. The best predictor of an investments performance is its entry price relative to its underlying value (clearly a subjective concept). However, I believe that is as good as it gets. Understanding that Mr. Market has mood swings is beneficial to getting the right price, attempting to predict them, is a more dangerous game.

Though it seems likely that within the next 6 months the S&P 500 could reach 1,300, if this occurs, your return will have little to do with company valuation relative to political meddling.

This distortion of asset markets is most worrying. Though with valuations as they are I would be normally making a louder noise to sell risk assets, the continuous intervention by politicians means there could well be room for further distortional rises in pricing. However, I suggest to all that your selling hats should be close to hand and that cyclical or capital intensive companies you have bought over the last 12 – 18 months, you should consider taking at least the profits. Being dependent on your local politician for a quick buck....need I say more....is not a dependent strategy. Only high quality companies, as an equity category, offer a relatively sound valuation at the moment.

Apologies for my bickering, but everyone has become so positive that I feel obliged to remind us that we quite possibily living in an illusionary world.. it may last longer than a honey moon, but buyer beware.......


Yours sincerely,

Alessandro Sajwani