Global MarketsMacro Trends

I see a tall, dark, handsome share price rise

16 Nov 2021 6 month(s) ago

Advisers like to see patterns in the past and claim they will repeat in the future.

Financial advisers love to detect patterns. They claim that identifying them in the past will give them some kind of superior insight into the future. It seems like a reasonable position to take, but in truth there is very little actual evidence that it does.

As large amounts of research has shown, for decades, almost most all fund managers fail to exceed the market average over time. They may in one year, but then they fall behind the next. It all tends to average out for the simple reason that the fund managers are the market. They are not above it in some magical way.

Still, it is always a good idea to see what fund managers are thinking to get some sense of the market’s direction. At the very least it can provide pointers as to why it is best not to act. Insync has given its version of events, arguiing bull markets go in three phases:

Phase I often starts in the depths of recession (the 08/09 GFC and lately the pandemic shutdown of 2020). It’s primarily driven by expanding central bank liquidity, falling interest rates and increasing fiscal policy stimulus. Prices can gyrate wildly, but a trend begins to emerge.

"Phase II kicks in as major stimulus from government policy wanes, but the economy remains strong in most important areas. The advance in share prices is mainly driven by underlying earnings growth.

"Phase III The last phase arrives when optimism turns into euphoria, and a booming economy begins to bring about monetary tightening. Price moves could herald a bear market beginning or a major slump.”

Insync says the global markets are in only their second phase:

“This is where dependable and sustainable earnings growth businesses perform better (and also where unprofitable growth stocks are showing clear signs of 'exuberance). Investing in sustainable earnings growth companies delivers consistent outperformance over multiple investment cycles- ideal for longer-term investors. This approach suits people who want to confidently compound their wealth with relatively low risk.”

Index investing is usually lower risk, but as Insync notes, the star performers tend to be the ones that shift the overall market:

“Most companies are below average players! Media and market participants often quote where the ‘market’ is headed and where a fund stands relative to a ‘benchmark’. It is instructive to take a look at what this means, and if they deserve to be the arbitrators of success or failure that many accept them to be.

“Evidence over time shows that it is a narrow group of stocks that provide most of the returns. This is not a new phenomenon. For example, only 4% of US companies were responsible for all net shareholder wealth creation between 1926 and 2019. A further example shows the ‘median’ buy and hold return of a US stock held from 1926 to 2019, was minus 2.9%!”

Insync claims their ‘rifle-like’ approach, picking high conviction stocks, is best. It should be. The proviso is that you have to have the right picks. And in the Australian market, because of the effect of dividend imputation and therefore the emphasis on after tax dividend returns rather than capital gains, there tends to be less concentration for market returns on just a few outperforming stocks.


Reader note: This is general reporting only and should not be considered in any way to be investment or tax advice. It does not take into consideration the investment objectives, financial situation or particular needs of any particular investor. For more information please read our disclosure statement.

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