​Wondering what's going on in stock markets ? It's all about positioning

Thursday, Dec 01 2016 by

Wondering what's going on in stock markets ? It's all about positioning

2016 will go down as the year of the underdog. Leicester City winning the Premier League at odds of 5000 to 1, BREXIT at 7 to 1 and Donald Trump at roughly 5 to 1. These were all unlikely scenarios that went against conventional wisdom. And so it also meant that fund managers were not prepared for them and everyone was positioned in the same way, ie overweight quality, long duration shares and underweight more cyclical areas of the market. After all the perceived wisdom was that oil would stay at $30 / bbl, iron ore would sink below $30 / ton and Glencore was almost certainly bust. Inflation was dead and growth moribund. In fact some high quality European companies such as Pharmaceutical company Sanofi could issue bonds with a NEGATIVE yield (as in you had to pay Sanofi interest for the pleasure of holding their bonds). In contrast high ROCE cash compounders like Sage had rerated from a 15x PE 4 years ago to over 25x.

Put another way, positioning had become consensual. We can see that because many UK equity unit trusts outperformed the FTSE AllShare by 10% or more in 2015. The FTSE AllShare was 4th quartile against the All Companies peer group. Passive investing was dead, long live active investing!

The reverse is true this year, those that outperformed hugely in 2015 have for the majority underperformed by almost a similar margin in 2016. It is not uncommon for fund managers and their unit trusts to have outperformed the AllShare by 12% last year, only to give 10% back in underperformance this year. I havent checked but I bet the FTSE Allsshare is top decile YTD. Ouch!

This consensual positioning creates real head aches for fund managers. For the most part they are bottom up investors who generally believe (nb what follows is a gross generalisation on my part) Benjamin Graham's assertion that "in the short term markets are voting machines, in the long term they are weighing machines". That is to say that companies in future will be valued off the cash stream they produce. So good quality companies like Sage and Unilever with good and growing market positions combined with strong cash flows are highly likely…

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The Sage Group plc is a United Kingdom-based company, which provides integrated accounting, payroll and payments solutions. The Company also provides the option of solutions hosted locally and accessed on-premise. The Company's segments include Europe, which consists of France, the United Kingdom and the Ireland, Spain, Germany, Switzerland, Poland, Portugal and Sagepay; and International, which consists of Brazil, Africa, Australia, the Middle East and Asia. It provides solutions that help businesses of all shapes and sizes to manage accounting and finances, manage payments, manage people and payroll, and manage the entire business. Its accounting solutions include sage One, sage Live and sage X3. Its payment solutions include sage Pay and sage Payments. Its payroll solutions include sage One Payroll, sage 50 Payroll and sage X3 People. more »

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Howden Joinery Group Plc is a manufacturer and supplier of fitted kitchens, appliances and joinery products. The Company is engaged in the sale of kitchens and joinery products, along with the associated manufacture, sourcing and distribution of these products. It offers products in categories, such as kitchen collection, including inclusive cabinets, accessories, handles and taps; appliance collection, including ovens, hobs, extractors, refrigeration, dishwashers, laundry; doors and joinery collection, including internal doors, sliding wardrobe doors, external doors, door frames, linings and casings, and moldings; hardware collection, including door handles, door furniture, door security, and tools and accessories; flooring collections, including laminate flooring and accessories, and bathroom cabinet collection, including bathroom accessories, bathroom handles and bathroom worktops. Its operations are located in the United Kingdom, France, Belgium, the Netherlands and Germany. more »

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The Royal Dutch Shell plc explores for crude oil and natural gas around the world, both in conventional fields and from sources, such as tight rock, shale and coal formations. The Company's segments include Integrated Gas, Upstream, Downstream and Corporate. The Integrated Gas segment is engaged in the liquefaction and transportation of gas and the conversion of natural gas to liquids to provide fuels and other products, as well as projects with an integrated activity, ranging from producing to commercializing gas. The Upstream segment includes the operations of Upstream, which is engaged in the exploration for and extraction of crude oil, natural gas and natural gas liquids, and the marketing and transportation of oil and gas, and Oil Sands, which is engaged in the extraction of bitumen from mined oil sands and conversion into synthetic crude oil. The Downstream segment is engaged in oil products and chemicals manufacturing, and marketing activities. more »

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  Is LON:SGE fundamentally strong or weak? Find out More »

1 Post on this Thread show/hide all

herbie47 1st Dec '16 1 of 1

I have Howden Joinery (LON:HWDN) on a watchlist but I feel it has further to fall. Re the £ it is up almost 10% against the Euro in the last few weeks, if Italy vote no on Sunday I think the Euro will fall, so we could be back to pre Brexit levels. Some are saying that a no vote in Italy could be the end of the Euro and if the main opposition are elected they will hold an EU referendum. So I would not rely on the £ staying low. Oil price has gone up partly because of OPEC cuts.

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