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Invesco Perpetual Says Beware Odd "Window Dressing" Equity Market Behaviour In December
Tom Burroughes
18 December 2014
The end of the year frequently sees odd investor behaviour as fund managers dump underperforming shares ahead of the New Year in an effort at “window-dressing” to improve the reputation of a manager. As a result of such tactics, moves in December can exaggerate trends in the previous year for little obvious reason, argues strikes me as one of the oddest phenomena in financial markets. We run money for the long term and quite often we will hold what appear to be the most-hated stocks in the market. We actually believe that to outperform over the long term, it often requires swimming against the tide, it requires holding your nerve and continually questioning your investment thesis and often it means you can look very wrong in the short term. The idea of dressing up a fund at year end to look like something that would have performed well the year before is therefore a very foreign concept to us,” Laing said. “What this means for December is that you tend to see an extrapolation of recent trends. And if you happen to hold some stocks that aren’t flavour of the month, then these can be subjected to further downward pressure. I think the energy sector is feeling a little bit like that just now,” he continued. Investors may be right to suppose that oil prices will be at an average level below $60 in 2015 and struggle to recover in 2016, Laing said. “We don’t think so, but we are quite willing to believe we could be wrong. But we are in the business of risk and reward and right now, in our opinion, the reward for thinking that oil prices will remain that low to us is dwarfed by the reward if oil prices were to recover towards $80 in the next couple of years,” he said. Changing tune “But it seems very unlikely you will find an energy share that has much of an underlying bid during what remains in 2014. Despite the negativity, we have started to see US companies react to the lower oil price with a supply response. ConocoPhillips has cut its 2015 drilling budget by 20 per cent, Apache has cut its North American capex by 25 per cent and Denbury Resources has halved its 2015 capex. I am reminded of the saying ‘the best cure for low oil prices is low oil prices’, however, patience will be required,” Laing concluded.
“We find it surprising how quickly Wall Street commodity desks have changed their tune on the oil price and there seems to be an end-of-year race to the bottom taking place. It’s poker in reverse. I’ll see your $70 and lower you $5 to $65. 2015 will be fascinating to see who is right,” he said.