‘If I panic, everyone else panics’ – Kobe Bryant

Basketball genius Kobe Bryant’s words have spoken to me quite directly over the last week or so as the global stock markets shifted from high optimism to…less optimism. Most of the blame seems to have been attributed to the impact of higher bond yields which – as a proxy for higher interest rates – is unsurprisingly not seen as particularly good news.

So what to do? Well the better news is that we have spent far too many of these weekly updates talking about the high levels of euphoria in global stock markets, so it would be a bit embarrassing if we had not built up a healthy cash balance beforehand or built up some investments which are less impacted by general market declines (we have – on both fronts).

But the question then logically becomes: so what comes next? And this is where the words of Kobe Bryant come to mind to me…and every other portfolio manager out there. This is because in the shorter-term the stock markets are confidence machines and as one old boss of mine famously opined: ‘if you have to panic…panic early!’

So should we panic? Let us look at the evidence. We know that the stimulus supplied by the world’s Central Banks is waning and that helped by better global growth rates and a little bit more inflation, those higher bond yields (and implied higher interest rates) are largely sourced from.

This all sounds rather pessimistic and given that stock market valuations are typically quite high, a thick slice of caution sounds sensible. However there are some positives out there. The aforementioned better global growth and a US dollar which continues to fade and so encourages American investors to seek opportunities in both the European and emerging markets. So put it all together and there is some good and some bad out there…and given the euphoric conditions of much of the last few months, a little bit of local volatility is not unreasonable.

So what to think? My main thought is that I think there are two really influential investment themes out there that have to be considered. Economic change and reform – changes by leading politicians including our own Government’s efforts to manage the Brexit process – matter more and more in a world where Central Banks are not stimulating so much. I have described this elsewhere as being like a baton relay handover in the Olympics. Will the professional politicians drop the baton or not?

Additionally we are in the midst of another quarterly corporate earnings data dump…and for a Fund which focuses on finding attractive and interesting large capitalisation equities from developed stock markets around the world this is much more of an opportunity than a threat. We are constantly looking for examples where a general panic contrasts with a more optimistic or opportunistic reality. And guess when such conditions happen most? To quote a famous expression by the world’s most famous current investor: time to get greedy when others are fearful…so long as those politicians keep at least one eye on economic reform.