Our round-up of the week’s best comment and analysis from the Financial Times focuses on the expectations of boom times for US stocks, the troubles of active fund managers and Italy’s dilemma after the referendum.
US stocks may be at record levels but there is no end to the party in sight thanks to animal spirits unleashed by the anticipated impact of Donald Trump’s policies, says JPMorgan Private Bank’s Richard Madigan.
“Markets are behaving rationally, even if they appear to be racing ahead of themselves. Markets do that. Neither growth nor inflation is running ahead of central bank expectations, a backdrop broadly supportive for US assets.”
Far more sceptical of the “Trump trade” is the FT’s Cardiff Garcia, who analyses how an obscure Cuba-focused US fund represents an example of the efficient market hypothesis breaking down.
“It is important to keep the Trump trade in perspective. Gains in equities, the US dollar, inflation expectations, and long yields accelerated may have advanced in response to the US election, but all of them started as early as mid-2016. Whether they have now raced ahead of fundamentals simply remains unclear for now.”
Mr Trump does not appear to have been much of a boon so far to the stockpickers at active managed funds, argues the FT’s John Authers.
“According to Barclays, 54 per cent of the US active equity mutual funds they track underperformed their benchmarks in the two weeks after the election. This has not, so far, been a return to sanity and careful stockpicking, but rather it has seen a lurch, all together, from one side of an overbalanced boat to the other.”
Also writing in the FT Markets series Age of the ETF, Miles Johnson says active fund managers should cheer the rise of exchange traded funds as a surge in passive investing is a good thing for traditional stockpicking investors.
“Many of the professional investors decrying the rise of the ETF have failed to identify the irony in their complaints: that those who live and die on their ability to exploit market distortions and mispriced assets are so troubled by products they argue are creating exactly the type of distortions they aim to profit from.
“The rise of the exchange traded fund, far from resulting in the death of the discretionary investor, may, in fact, present an increasingly fecund environment to find undervalued securities.”
BlackRock’s Mark Wiedman hails the rise of bond ETFs that provide investors with critical liquidity at times of wider markets stress.
“By creating exchange trading of bond risk, ETFs can also help ameliorate the financial system’s vulnerability to shock. The old market depended on leveraged firms for intermediating risk, whether through cash bonds or derivatives. The new market offers another, unleveraged way to trade.”
While Italy might be stuck between a fiscal straitjacket and its ailing banks, the FT’s John Plender argues it is possible to make a case that Italian government debt is oversold.
“Any additional risk premium for these uncertainties has probably already been built into Italian asset prices. A domino theory for the eurozone, starting with Italy, looks needlessly alarmist — for now.”
Meanwhile, the oil futures curve is raising doubts over the sustainability of the Opec rally, says the FT’s David Sheppard, as the cartel is reliant on rising demand and production declines outside the US to keep prices buoyant.
The FT’s Neil Collins has “the mug punters” who invest in spread betting stocks in his sights, noting they have “seen the value of their bets tumble by a third or more, as shares in IG Group, CMC Markets and Plus500 all collapsed”.