As I write this my Bloomberg screen is awash with red figures. The Dow Jones is down over 200 points, copper is falling fast and we are watching the market's ‘Santa rally' of December 2009 hit the buffers. This has been fuelled by worries over China wanting to slow down, sovereign risk in the most indebted Western economies and new fears that a double dip may be around the corner.
We have positioned the Absolute Return Fund in a relatively neutral fashion, with a bias towards cyclical companies amongst our short book, which is helping the Fund to steer its way through the current market with small positive returns.
Do I think we are going into a double dip? No one can predict these things with 100% accuracy, but I think that the risk return profile on many stocks has left them unattractive and that it is better to play on the short side than the long. What I mean is that many stocks had 20% upside if the global recovery came through but 50% downside if things turned down again. With that profile in many stocks, some sort of correction was highly likely and we are now seeing it come to pass.
It does remind me of this time last year: a strong bear rally through Christmas and then an aggressive sell off through to March. Actually, we also had a similar situation in 2008, as we launched our Fund in March 2008 after a nasty sell off in the first few months. Many people were saying the first half of 2010 would be fine, but it could get nasty in the second half of the year. I was concerned that a sell off could be imminent.
Is the market indicating that we are sliding back into recession? Well, with China slowing its loan growth and quantitative easing programmes coming to an end, a withdrawal of the excess liquidity that fuelled this rally will be a test of the resilience of global recovery. It may be that a market correction will spur authorities to put the stimulus programmes back on but firstly we may have some more pain to take....
