No market, sector or size rules for ever; the wheel always turns
Howard Marks (pictured) is a billionaire investor who’s been successfully investing through the many market cycles since 1970.
Warren Buffett once said of him, ‘When I see memos from Howard Marks in my mail, they’re the first thing I open and read. I always learn something.’
If it’s good enough for Warren …
In his 2018 book Mastering the Market Cycle: Getting the odds on your side, Marks talks about the importance of knowing where you are in the cycle, because, ‘the odds change as our position in the cycles change’. Since we can’t know the future, the secret is investing with the odds on your side.
Looking for clues
So how do we know where we are in the cycle?
Unfortunately, no one rings the bell at the top or bottom of cycles – so all we can do is look for clues.
Marks suggests there are three stages of a bull market:
- Only a few unusually perceptive people believe things will get better
- Here, most investors realise that improvement is actually taking place
- Everyone concludes things will get better forever
Now let’s apply his approach to global investing today.
America first
The MSCI USA Net Total Return index (‘USA’) has beaten the MSCI World ex-USA marker (‘ex-USA’) in 12 of the past 15 years.
After such a winning streak, it’s no surprise that most people think the USA will always dominate. But perhaps a record-breaking $600bn flowing into US equity ETFs in 2024 is a clue that we’re in Stage 3?
As the saying goes, ‘what the wise man does in the beginning, the fool does in the end’.
Because the US hasn’t always been the only place to invest. In the 10 years to 2009, ex-USA beat USA seven times; the 10-year compound return of ex-USA beat USA for 10 consecutive years to 1994.
This time it’s (not) different
‘Yes, but that was before AI or dominant US technology,’ you might argue. Well, highs always happen on a good story and it’s also not the first time that the market is convinced that a country will dominate forever.
In 2015, the 10-year compound return of the MSCI China index was twice that of the MSCI World – 10% vs 5%. You can imagine the romantic story back then; China has a large, smart, highly educated, hard working population that is urbanising. All true.
Except after that decade of strong returns, everyone already knew and believed that and so the high prices reflected that knowledge. The result was a cycle that had run its course. Unfortunately for those who invested late, the 10-year return to 2024 has been just 2% a year for China against 10% for the World index. No wonder some strategists deemed China uninvestable in recent years.
Smells like stage 3
Cycles aren’t confined to markets or regions. Let’s start with styles.
From 1974-2008, the MSCI World Value index beat its Growth equivalent in 23 of 34 years, returning 11% vs 8% a year. But the pendulum had swung too far and in the 16 years since then, Growth has beaten Value in 13 out of 16 years returning 13% against 9% a year.
But when polled ‘what sector will perform best in 2025?’ at a recent Goldman Sachs global strategy conference in London, 42% answered tech, more than twice any other sector. Stage 3 anyone?
The same applies to size.
The World index has beaten the Small Mid Cap index (SMID) index for the past seven consecutive years. But that followed a period when the SMID beat the World index on a 10-year rolling basis for 16 consecutive years prior to 2019.
I recently heard about an institutional investor who is redeeming from a SMID fund to invest in a Mag 7 ETF. Again, full on stage 3 vibes here.
What to do (and not to do)
One way to cope is to avoid being overly exposed to a single theme after a protracted period of outperformance.
Instead, perhaps take a clean sheet approach and ask yourself what you’d allocate today if your entire portfolio was in cash. And diversify – it’s the ‘only free lunch in investing’ according to Nobel laureate, Harry Markowitz
Because trees don’t grow to the sky and the world is full of surprises. You might not have guessed that in the three months post the US election, the German Dax would beat the S&P500 by 13%, Alibaba would beat Nvidia by 38% and the Brazilian stock market would be up 13% against the Nasdaq’s 1.7%.
In other words, don’t be too certain about any conviction you may have that US equities are the only game in town.
Let’s end where we started, with Howard Marks.
‘In investing, there is nothing that always works, since the environment is always changing,’ he once said. ‘And investors’ efforts to respond to the environment cause it to change further’.
Sean Peche is a value investor with a Citywire AA rating who manages the Ranmore Global Equity fund (Irish Ucits) and blogs on LinkedIn with the hashtag #numbersnotnarrative.
In the three years to the end of January, Peche ranked first in his 67-strong peer group, with his fund returning 61.8% versus a sector average of 24.4%.
Disclaimer
All returns quoted are measured in US$.
Ranmore Global Equity Fund holds shares in Alibaba.
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