‘More money has been lost because of four words than at the point of a gun. Those words are “This time is different” ‘ – Carmen M. Reinhart
Happy New Year to all readers…and judging by the enthusiastic response of the world’s equity markets in the first week of 2018 the festive cheer remains very much in evidence. Consistent with this excitement the phrase I have been hearing far too much from those who should know much better to describe prospects for financial markets over the next twelve months is ‘melt-up’.
So what exactly is a ‘melt-up’? I am indebted to Investopedia for providing a definition which they initially describe as:
‘A dramatic and unexpected improvement in the investment performance of an asset class driven partly by a stampede of investors who don’t want to miss out on its rise rather than by fundamental improvements in the economy…’
Well how exciting! Of course the history of finance is populated by periods of deep excitement and extreme depression – such is the potential psychological impact of (respectively) fear and greed. Typically – to quote those value investing bastions Benjamin Graham and Warren Buffett – investors should ‘get greedy when others are fearful and fearful when others are greedy’ but saying those words is much easier than actually undertaking that advice.
But actually the above is not the useful part of the ‘melt-up’ definition, I believe this second half if much more insightful for thoughts towards 2018:
‘…Gains created by a melt up are considered an unreliable indication of the direction the market is ultimately headed, and melt ups often precede melt downs’
Now we are not calling a big horrible negative financial market here at the Dynamic Opportunities Fund but what we do see are plenty of unrealistic hopes and mis-perceptions which have caused the stock markets globally to push a good number of shares and sectors to overly excitable levels…whilst a good number of other shares and sectors have been ignored as being too dull, strange or weird and have unreasonably been rotated against. This time is certainly not different despite the wishes of a fair number of market participants.
Of course from the perspective of the Dynamic Opportunities Fund plus ca change. We launched the Fund four months ago with the view that too much fear over Brexit, underappreciated reforms in Europe, the impact of higher interest rates and inflation compared to the last few years and a general good level of opportunity in ‘left behind’ good value shares in all geographies would provide an attractive opportunity set. Since launch this is where we have focused our investing attention and this is where it will remain. We believe the progressive ending of unfettered central bank stimulus pushes the big picture macroeconomic backdrop in favour of our preferred investment themes.
For us looking forward into 2018 the most exciting aspect of global stock markets is not a ‘melt-up’ but that the range of compelling ideas from our perspective of looking for investment anomalies continues apace. We spent the holiday period finalising some new investment ideas which we will talk about next week once we have made our initial purchases.
And that certainly makes it a Happy New Year as far as we are concerned.