Didier Le Menestrel

If only we had known!

Which investor has not dreamed of arriving at the office with a copy of tomorrow’s newspaper?

No matter how exciting it sounds, prior knowledge of certain data does not necessarily lead to the smartest investments. Indeed, whoever knew in advance that earnings reported by CAC40 companies were going to drop 26% in 2012, would have clearly avoided buying shares; what a mistake it would have been since the CAC40 ended up gaining 15% over the year.

An isolated example ? Not so sure… Over a longer period, global growth rose more between 2000 and 2010 (+3.8%) than it did between 1990 and 2000 (+3.1%) (1). Nevertheless, it was the first decade of the two that, in spite of lower economic growth, was the most beneficial to investors as MSCI grew 145% (vs. -12% from 2000 to 2010).

Closer to home and more spectacularly, the “French conundrum” remains an inexhaustible source of reflection. Remember how, a year ago, a futures contract on French debt was (re)launched. The tool, considered as a “weapon of mass destruction” likely to be used by hedge funds to speculate against French debt, was destined to surprise more than one investor. The election of François Hollande, the rising unemployment and the inability of France to respect its budget targets were some of the combined ingredients justifying high tension in French rates and a much feared decline in the famous “OAT(2) future”. However, quite the opposite has happened and, 12 months after its launch, the product is now worth 9% more than its issue price. And with a yield less than 2%, long-term French debt has never been so wise…

Does this mean that markets are too erratic to link their performances to real data? This is not our interpretation.

A first answer, dear to philosophers and the French national railway company SNCF, is that “one train can mask another (“un train peut en cacher un autre”): the fact that results of CAC40 companies dropped 26% in 2012 was (partly) because Crédit Agricole lost €6.5bn over the year. This trend was considered temporary by investors, making the reading of CAC40 decrease in earnings non-exploitable. While this response is enlightening, something else is still missing.

This something else is the opinion of others, and the opinion of others is the beginning price. Back in 1990, the MSCI was pricing an average “expectation” of implied growth. Thus, the good performance of the 90’s stemmed from a double effect:
–  Actual growth was better than expected (“welcome news” effect)
–  Investors were confident that it was set to last (or to improve as in the 2000’s)

Investors, like cyclists attempting to break away, must firstly assess the pack. As contrarian and autonomous as they may be (and we would like to be!), they can never really fully ignore the opinion of others, not only in order to comply, but to ensure that they have not missed something.

During these periods of downgrades of French growth estimates and difficult European news, we find our convictions in this stance: if the markets resist, it is not because investors have forgotten to read the papers. On the contrary, it is because they have been reading them for months…

Didier Le Menestrel
With Marc Craquelin

(1) Les Cahiers Verts de l’Economie
(2) Obligation Assimilable du Trésor