February 5th, 2013 / The Telegraph
‘’It doesn't matter right now which shares one owns, the important thing is to be in shares at all’’ by James Bartholomew.
One phrase is heard and seen above all others in the investment world right now: "the great rotation".
It is a magnificent phrase indicating something grand and slightly agricultural. It is the latest in a long line of concepts and phrases that have come and gone. Not long ago we were all thinking about "quantitative easing". In previous eras "a wall of money" was going to make share prices rise and, in an even earlier decade, "inflation hedges" were meant to enable one to survive sky-high inflation. "The great rotation" is a vintage phrase. One to savour.
What does it mean?
It means that investors are in the process of "rotating" out of bonds and into shares. And it is "great" because it seems to be taking place on a massive scale. People with money to invest have been sticking to bank deposits, government bonds and corporate bonds for years – probably since 2008. They have been frightened off shares by the banking crisis, the recession and the euro crisis.
This, plus the quantitative easing, caused a remarkable bull market in safer government bonds such as the German, British and American ones. As the prices went up, income yields correspondingly went down to practically nothing. For a long time now, shares have clearly been better value than government bonds but still people fought shy of them. Or they did until some time in the latter part of last year.
Figures from the Investment Management Association show that last November net investment in British shares through unit trusts and so on was £221m, whereas the average for the year previously had been net disposals of £126m. A complete turnaround. Investment in British shares was the highest since way back in May 2007. The huge lapse of time indicates just how long the British public has been fearful.
Since the new year started, the FTSE 100 index has burst decisively through the 6,000 level, which indicates that more and more people are being tempted back to the stock market. I see the attitudes of family and friends changing. One risk-averse friend suddenly acceded to my urgings to buy shares after years of resistance. Even the general media has begun to pick up on the idea that something is happening.
The big question now after such a surge remains: "Is there more to come?"
I believe so. Much more. The FTSE 100 index has only just broken through the 6,000 level, which had blocked it for more than two years. When a market finally gets though a "resistance" level that has persisted for so long, it normally makes substantial further progress.
There could well be a retreat to 6,000. That would be normal, too. But then the advance will be renewed. A rise to the highs of 2007 – around 6,700 – seems probable. It would not be surprising to see the index challenging its all-time high of almost 7,000 by the end of the year. After all, that was 12 years ago. The chart makes it likely and the fundamental values make it reasonable. But this is not only in Britain. It is a worldwide bull market.
Which shares should one hold?
It depends how aggressive you want to be. The biggest gains will probably come in shares that have been considered risky. This whole "rotation" is taking place because investors have become less risk-averse.
For myself, I am trying to keep some balance between my aggressive "risk on" shares and more defensive ones such as Telecom Plus, the utility company. I would like to keep some stability so that I keep my nerve if there is a reverse. But I confess I have been getting more and more aggressive. I have bought shares in a Greek oil refinery and increased my stake in a Chinese zinc mine. One of my medium-size stakes is in the PXP Vietnam fund. I also have shares in Brookfield Residential, an American company that has already risen a long way because it is a play on the fast-recovering US property market. It is hard to believe there is more to come in that one but I have learnt from bitter experience not to sell out of a rising star too early. I have a bigger stake in Lloyds Banking Group, which has come back to profitability and remains at a discount to its net asset value. The upward trend in the shares has been established for more than a year.
Commodity companies such as Rio Tinto remain good value. But, frankly, I feel it does not matter so much right now which shares one owns. The important thing is to be in shares at all.