WHY EUROPE IS FALLING AND WHY IT IS A GOOD TIME TO BUY

One of the most common debates that I have with my clients and investors generally is whether it is better to be a long term buy and hold investor or if in fact it makes more financial sense to trade the stock market. Advocates on either side will tell you why theirs is the most compelling argument. For example, a buy and hold investor will tell you that ‘it’s not timing of the market but time IN the market’. A short-term investor on the other hand will tell you that the only way to beat the market is to trade the market; otherwise you may as well buy an index rate tracker. Whilst both statements have some element of truth in them the critical point that they both wildly miss is that one strategy is not mutually exclusive to the other. For a start what does ‘long term’ even mean? – for the bond market long term could mean 30 years but for currencies it could be just a week. For equities who knows what it means? Secondly, why can’t it be the case that when he market is rising and in a bullish phase of higher highs and higher lows, that an investor adopts a buy and hold approach and when the market starts to lose momentum and begins to enter a more bearish phase or one that is more ‘range-bound’, that an investor looks to jump in and out accordingly. That is to say that a buy and hold strategist can still sell sometimes whilst adapting an overall long-term approach true to their conviction. Similarly, a short-term investor could hold some shares or funds with a long-term horizon if the right market conditions prevail. It’s as if there are these two great swathes of the investment community that are constantly competing with each other when it’s not necessary. Each group is equally adamant that their way is the right way, in fact the only way, when we know that it’s just not true. The fact is that agility and being able to react to market conditions and adopt a strategy best suited at that moment in time, is the only way to ensure success. Take Europe for example. In the past couple of months European funds have been under extreme selling pressure and many big household funds have fallen by around 10% in that time. In fact, we have seen a staggering $4billion move out of European funds in the past month, and $11billion move out in just the last quarter. Now you see, buy and hold investors will say that they are in for the long term and the fact that they have just lost 10% of their portfolio value is irrelevant because they have no intention of selling. I don’t buy that argument because for me it’s still a loss, whether you crystallise it or not. Similarly, short term traders might be tempted to buy now when in fact the downward pressure hasn’t yet subsided, or worse still they might be buy but then close out too early. That’s an even worse strategy. So, let’s look at the facts because that seems to be the only thing that the two conflicting parties can agree upon. Firstly, Europe is suffering because it exports 44% of its goods and services and so obviously the trade protectionist policies which are now arising particularly from the States but being mirrored globally are never going to be particularly helpful. Compare that number to just 12% for the US and 28% for the UK and you can understand why it’s a policy so favoured by Trump. The second reason which is also having a massive effect is that Quantitative Easing (QE) is now being tapered and so the whole money-printing concept is going to be thrown out of the window very shortly. Imagine an average person who has been pumped with steroids for several years resulting in a transformation into a world class athlete, suddenly being told that the steroids are no longer available. That’s kind of where we are with Europe right now. Not good news. And the third and final reason is that political Europe is broken. Italy for sure in my opinion will leave Europe eventually and that will spell the end of the Euroland project that was always destined for disaster. Now that doesn’t mean you shouldn’t invest for the short term. To the contrary PE ratios on the EU Stoxx 50 Index is below 15 compared with a fairly toppy 21 for the S&P 500. Yields in Europe are also more attractive trading at close to 4% compared with a fairly slender 1.7% in the US. So, Europe will recover in my opinion and represent a good, short term buying opportunity at least. So, you should get some good returns in Europe over the next year or two (notwithstanding a market correction which I am still predicting will happen either this year or next), but with the caveat that you don’t want to be holding onto Europe funds or shares for the long term. Whether you are short term or long term, or you just don’t know, forget the title for a second. What’s important is what is right for the market at that moment in time. Don’t be so sure to always assume that your one strategy works all of the time – it doesn’t. Double your strategy and you have a better chance of doubling your returns.