Sometimes when undertaking Big Picture investing it is important to stand back and remind yourself of the story so far.
Last year we recommended people be in cash. There was a nasty credit crunch underway, and it was likely to damage asset values.
This year we said low interest rates would make cash a poorer investment, whilst after a year or so of ultra low interest rates there would be some kind of economic recovery. In the meantime, the advent of quantitative easing in both the UK and US would probably boost asset prices as people sought homes for all that liquidity, whilst worrying about government bonds.
We also said that the Big Picture remained in our view the same as the last decade - Asia and some emerging markets elsewhere would grow much faster than the US or Europe. Equity investing is about investing in growth and rising income, so it seemed to make sense to orient portfolios heavily towards Asia.
So far this year it has been possible to make good money in Asian equities, whilst seeing recovery in US and Europe after a further nasty slide in the first couple of months of 2009. There are now signs of monetary throttling back in China, whilst India is somewhat overheated. Commodities have rallied strongly from low levels on the back of Chinese stocking and easy money in the West moving speculatively and early into them.
So what should you do now? Traders have taken some profit this week on China. This may present a buying opportunity for longer term investors, as the underlying story remains good. It does seem another good chance for a conventional portfolio to switch more money out of UK equities into Asian equity, as the UK market has performed well for several weeks. Sell the UK now, and buy Asian equity on dull days. There will be further bumps in the markets as people focus again on the need for the West to wean itself off quantitative easing.
The big picture remains the same as before, only more so. Asian growth was far faster than US/UK and Europe in the decade to 2007. The gap will continue, as now the US and UK economies have to deal with the massive overhang of debt, both public and private, whilst shifting away from so much domestic consumption which sucks in imports. The bull case for UK equities over the last week as reported in the newspapers is based on the charts, not on any underlying reality from the dividend earning industrial or service sector. On the continent of Europe the strains and stresses of the Euro will become more pronounced in their impact on the peripheral economies. The demographic time bomb is also ticking, producing countries with ever more dependent pensioners to workers.