Our commentary is running a little late this month. The reason is that I have been struggling to find a key of interpretation of financial markets in the latest weeks.
So far, in 2017, we had very benign markets. Most of the global equity indices trade at, or close to, the highest levels of the last few years or at record highs. Credits behave well both in DM and EM. Currencies did not move much. Even commodities did not show any signs of their well-known nervous behaviour. We end up with extremely calm markets that digest all sort of geopolitical and economic news. An environment of very low volatility and positive inflows
Weird people like me, that still have not managed to distance themselves from Bloomberg screens for a full day, should have noticed that markets had an impressive streak of mild moves: +0.1%, +0.2%, -0.15%, -0.22%. +0.18% etc etc. Then, suddenly a gentle upward jump of something like +0.8%. In the US we had over 100 days without a down move of 1% or more.
There was just a “bad “day around the triple witch expiry but then we dialled back to the old habit of small deviations. Sum all this up and you get a return of +6% or more in the first quarter for most of the major indices. This happens in a context of very high valuations.
So, value investors following the legendary Sir John Templeton’s old advice “buy when others are despondently selling and sell when others are greedily buying” have been at the window for a long time now waiting for some sort of pullback to get back into action.
There has been no “selling” around.
I was immerse in these thoughts one evening on my couch distractively following a champion’s league football match on TV. I said to myself: “this market is like the old Barcelona playing tiki taka with me and my fellow value investors”. This is exactly how I feel
Let me explain a little bit better.
For those not into football, in the years 2008-2012, Spanish Liga’s formidable club Barcelona developed a characteristic playing style under manager Pep Guardiola. Thanks to extraordinary talents such as Lionel Messi, Iniesta and Xavi, Barcelona kept passing the ball between its players for most of the game with fast short passages in perfect geometry. It had possession of the ball most of the time with percentages as high as 80% even against very valid challengers at home or abroad. As an opponent, you could not do much. You simply had to suffer 90 minutes in tight defence while they were ridiculing you with their juggling techniques and, occasionally, even scoring a couple of goals. During those years they won everything and it seemed that their approach was undefeatable.
In a parallel with financial markets, short passages are the small moves of a bunch of basis points every trading session and goals are like the positive +0.8% days.
This year market plays tiki taka with value investors and it is winning by a good margin.
However there are some interesting read across.
The first one comes from the manager Guardiola. He left Barcelona for other teams with extraordinary talented players such Bayern Munich and Manchester City but never played tiki taka again. Of course, his vision and principles did not radically change but he had to adapt to new conditions. This is a good lesson for investors: stick to your investment principles but be prepared to adapt to different environments
Another lesson comes from Barcelona itself. After many years, it is still a very competitive team even if they are not playing tiki taka anymore. This is a great achievement. They realized that time passes and they could not play the same football forever. Players changed too. Messi is still at an incredible level but he has a number of new teammates and they have very different qualities. They had to change to stay on top. This is another lesson for us: be flexible when conditions change and always question yourself.
Finally there is a story regarding Barcelona and the end of tiki taka that gives us some hope. It is the story of the 2012 Champion’s League semi-final against Chelsea. Barcelona was a strong favourite. It seemed impossible that Chelsea of the relatively inexperienced manager Di Matteo could stand a chance of winning against one the best teams ever, their incredible playing technique and the genius of Pep Guardiola. And then, the impossible became reality. Chelsea played an “ugly” football suffering like hell against the usual field superiority of the Spaniards. Despite this, Di Matteo led Chelsea to a 3–2 aggregate win over Barcelona, winning 1–0 in the first leg at Stamford Bridge, and following this with a 2–2 draw in the second leg at the Camp Nou (later that year Chelsea even came out victorious in the penalty shootout against Bayern Munich in the Champions league final). Paraphrasing Benjamin Franklin’s maxim, it was the small crack that sunk a great ship.
It was the end of tiki taka.
With hindsight, what can we learn from this? I would say “nothing is eternal” and we can still hope to face a different market environment in the not so distant future. A welcomed return of volatility that could reopen some areas of value for us to dig. Like Di Matteo’s Chelsea, value investors might not play that well for some time but they still stand a chance to win.
CFA, Compass Asset Management S.A.
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