Seasonal flows
After a radiant summer, which nobody really expected on the markets, September could have set the stage for a difficult return to reality. However, despite a flow of not particularly encouraging news on the international front (US budget, emerging markets currencies, crisis in Syria) and locally in France (taxation, social troubles, unemployment), financial markets in developed countries continued to positively surprise observers. The benchmark US market, the S&P500, has regularly established new records since April (1,757 points on 31 October) whereas the CAC 40, still well below its record highs, has gained an attractive 18.1% since the beginning of the year (4,300 points).
These stockmarket rallies were accompanied in the autumn by restored volumes in a large portion of Europe. So what are the reasons behind these healthy flows that nobody expected to be so strong?
Firstly, the most factual aspect concerns a wide-scale migratory trend. Anticipating a return to better days in Europe and faced with the increasing difficulty of finding new performance niches in their domestic territories, international investors have apparently set their hearts on Europe as a place to spend the winter. By adding a fifteenth week in a row of positive inflows since July, European equity funds have just beaten a record dating back 11 years (1). The announcement of GDP up 0.3% in Q2 relative to Q1 after six quarters of decline was clearly a contributing factor and adds weight to the trend.
The second, more French-based reason highlights the arrival of the PEA-PME equity savings plan on 1 January 2014. This new tax measure could attract EUR4bn for small and mid-sized companies (PMEs) and intermediate-sized enterprises (ETIs), and thereby redirect a portion of French savings towards the financing of this extremely important economic tissue. Has this transfer of flows, synonymous with upward momentum, been anticipated? Very probably in our view and the size of the universe concerned means we should see things in perspective: the overall market capitalisation of the 3,800 European companies eligible for the savings plan, according to the latest criteria provided by the French government, exceeds €700bn.
The final, more academic reason stems from the Royal Swedish Academy of Sciences. In choosing to reward three US economists for “their empirical analysis of asset prices”, the selection committee for the Nobel Prize for economics has reminded us that the stockmarket is not a casino and that prices of financial assets can be established using thought and know-how. The respective works of the three winners Eugène Fama, Robert Schiller and Lars Peter Hansen, have notably proved that while asset prices and value may differ in the short term, they converge over the long term.
This assertion is welcome news for professionals in the sector and was already highlighted by Benjamin Graham and David Dodd (2), who were the first to affirm that, via in-depth financial analysis, investors could determine the inherent value of a company. “Value” investments were created in this way and would go on to make Warren Buffet one of the most brilliant investors of the past century. This is also a theme that has fully benefited the Echiquier Value fund this year.
“Ah! How vast is the world in the light of a lamp,” exclaimed Charles Baudelaire in The Flowers of Evil. From BRIC countries (3) to the Next 11 countries (4), capital has travelled the world looking for future areas of growth. A 10-year round-the-world trip, which has ended with Europe, like a return to basics. Let’s guess that investors stay for longer than just the winter before migrating again.
Didier Le Menestrel
(1) BofAML / EPFR Global data
(2) Security Analysis published in 1934
(3) Brazil, Russia, India and China. Acronym developed by Jim O’Neill in 2001
(4) List of 11 countries developed by Jim O’Neill in 2005