Stocktake: Don’t fight the ECB

While US equities have sagged in recent weeks, European stocks have scored double- digit gains, mainly on the back of enthusiasm regarding the ECB’s belated embrace of quantitative easing.

Will QE work? Any effect on bond yields will be limited – after all, they are already at rock-bottom levels.

QE has certainly weakened the euro, however, and that has already boosted European earnings, according to Barclays.

Although European equities account for just 15 per cent of global market capitalisation, Barclays recommends investors up their exposure to 26 per cent, while whittling down US allocation rates.

Deutsche Bank’s Jim Reid is sceptical regarding QE’s economic impact, but believes it will nevertheless juice European equity prices. Ultimately, that’s what QE tends to do. Stocks and other risky assets may not be cheap, but in an environment of negative interest rates and paltry bond yields, investors have little choice but to chase them.

The main European markets were resilient last week; though already technically overbought, they held on to recent gains, shrugging off the stock market chaos in Greece.

It all suggests that European investors are likely to remain in forgiving mood in coming months.

"Don't fight the Fed" was the mantra of US investors in 2013 and 2014; now it may be Europe's turn. Momentum suggests gains History also indicates European outperformance is set to continue. Since 1997, says Nautilus Research, there have been 12 occasions when the German Dax traded at new 52-week highs even as the S&P 500 lagged behind.

Three months later, the Dax was higher on all but one occasion, enjoying an average gain of 9.19 per cent – almost four times higher than average – and easily outperforming the US. Nautilus found seven occasions where the Euro Stoxx 600 was as technically extended as it was last week. Six months later, it was higher on six occasions, gaining an average 10.4 per cent.

Clearly, momentum is a powerful market driver. Right now it's with Europe. Odey betting on market bust UK hedge fund manager Crispin Odey doesn't share the optimism, warning that equity markets face being "devastated" by global central banks' inability to avoid a "deflationary bust".

Odey is worried by a slowing China, falling commodity prices and emerging market incomes, and equities being “priced for perfection” despite the looming risk of Japan-style deflation. He believes this is the first stage of a downturn that might “be remembered in 100 years”.

It sounds hyperbolic, but Odey, who manages $12.2 billion and has enjoyed huge returns over the last two decades, is no permabear.

He famously shorted British banks prior to the global financial crash, gaining 55 per cent in 2008, only to turn bullish and take a stake in Barclays when others were giving up hope. He remained bullish even as markets headed south in 2011, saying European stocks were “mouth- wateringly attractive”.

Odey has now turned bearish, saying the shorting opportunity “looks as great as it was in 07/09”. Investors will hope that, this time, Odey is off the mark.

Seeing beyond hedge fund spin Hedge funds have earned $1.5 trillion for investors after fees since 2005, according to a gushing Alternative Investment Managers' Association (AIMA) report last week.

Unsurprisingly, the 27-page report doesn’t say how much investors forked out in fees. Nor does it mention the Alignment of Interests Association, which recently called for management fees to only cover costs rather than be a source of profit, and for funds to beat benchmarks before charging performance fees.

The report enthuses that over half of defined benefit pension schemes in the UK now allocate to hedge funds or other “alpha-seeking strategies”. However, pension funds should note that the $1.5 trillion profits figure is profoundly unimpressive, given the industry manages roughly $3 trillion in assets.

Hedge funds have underperformed the S&P 500 for each of the six years. Worse, they underperformed the old-fashioned 60:40 portfolio (60 per cent stocks, 40 per cent bonds) for each of the past 12 years.

For this pathetic performance, investors fork out annual fees ranging from 1.26 to 1.62 per cent, according to the AIMA report, as well as performance fees ranging from 16 to 19 per cent.

Betting on hedge funds, George Soros said at Davos recently, "is not a winning strategy". Pension funds should listen to Soros, not to AIMA. In numbers 10.4 Apple, easily the most valuable company in the world, trades on just 10.4 times forward earnings, after accounting for its enormous cash pile.

18 Apple last week announced $18 billion in profits – without a doubt the biggest quarterly profit in history.

69 The iPhone accounted for 69 per cent of Apple’s revenues. 178 Apple’s $178 billion cash pile is more than the market capitalisation of 483 S&P 500 companies.