One of the UK's largest charities, the Wellcome Trust, recently cut its exposure to listed equities. Its allocations to stocks were slashed to the lowest level for more than two decades.
The decision follows an overall investment return for 2022, of just 1.70%. Down sharply from the record 34.50% generated the year before. When the charity netted a whopping £10 billion in capital gains alone.
The chief investment officer at the fund warned of tough times ahead, saying that he would be happy if he averaged real returns of 4% per annum, over the next decade.
That compares to the average real returns of 11% per annum, which the fund has achieved since 1985.
Wellcome wasn’t alone in its negative outlook, high profile fund manager Terry Smith has also warned of tough times and meagre returns for investors, in the year ahead and beyond.
Positive returns are out there
However, despite all the doom and gloom, we don't have to look far to find decent returns in the early stages of the New Year. In fact, you just have to hop over the channel to mainland Europe, to find a performance that’s knocked 2022 into a cocked hat.
We are not talking about smaller companies here or biotech stocks that soar on drug or treatment approvals. No, these are gains made by blue chip equity indices, which contain Europe’s largest companies.
The chart below shows the performance of the Euro Stoxx 50 index over the last 4 months.
Eurostoxx 50 is, at the time of writing, up by +8.0% year to date as is Sweden’s OMX, the Italian MIB index is up 7.80%, and the Dutch AEX index are not far behind, up by 7.20%. Indeed, nearly all major European indices are in positive territory in the first two weeks of the year.
Are you looking in the right place
This makes me wonder if funds such as Wellcome are looking in the wrong place for their returns?
A huge fund such as this has to consider many factors before taking the plunge into the markets, and it's likely to be more of an oil tanker than a speed boat and therefore much slower to react.
However, the potential of European equities and their lowly valuation, relative to their US peers, was highlighted back in the autumn by the likes of JP Morgan and others.
The uptrend in the Euro Stoxx 50 began on October 17th, so I think it’s safe to say that the opportunity was well signposted.
Have European equities run their race?
Interestingly, strategists at JP Morgan are now suggesting that it's time to take profits in European equities, and yet the move higher continues unabated.
Goldman Sachs has even gone as far as to say that it no longer expects a recession in the EU in 2023, thanks to a combination of falling natural gas prices, warm weather and reduced energy usage.
The trend is your friend
Retail clients enjoy few advantages over institutional investors however the ability to move quickly is certainly one of them spotting and joining a new trend and running with it is a proven trading strategy.
Indeed identifying trends, and any changes in them is a cornerstone of technical analysis and in particular, candlestick charting which is perfectly suited to that purpose.
When all is said and done an uptrend is simply a continuing pattern of higher highs and higher lows. Whilst a downtrend is defined as a series of lower lows and lower highs.
If we can combine trend spotting and following, with the search for under or overvalued assets, then we’ll possess a set of very powerful trading tools indeed.
The beauty of this approach is that we don't need to jump in ahead of the crowd.
Instead, we want the crowd to jump in ahead of us, to confirm the trend at which point we can join it. We won't ever catch the top or bottom of the move by doing this, but we will probably sleep easier and make more money by avoiding an illusory first-mover advantage.
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