While most of the world helplessly watches europe slide into recession and battle to save its currency, there are those few who charge in early for bargains. One Wall Street chief strategist told me that the chaos has created a major buying opportunity. However, he added that deal hunters have to be savvy enough to pick through the rubble for single stocks, not simply load up a shopping basket via a pan-European ETF. Even the most optimistic worry that the bulk of the continent could stay in the doldrums for a long time.
I pointed out that most people have gotten used to buying index funds and ETFs, not individual stocks. But he believes a new day is coming when investors and their advisors will have to start picking stocks again in order to get the best deals (and the diversification).
Of course, this makes great fodder for the active-versus-passive management debate. Another thinker agreed that the havoc wreaked over the last couple of years in Europe could very well prove a good opportunity for bargains, notably for investors with a taste for European-based companies that do business abroad and are not overly exposed to the struggling continent. This strategist agreed that being a discerning investor is critical now and even suggested that the pendulum had swung too far toward passive investing. The time is ripe for a swing back to active investing, he says.
Further, while nodding to the enduring appeal of low costs, wide diversification and transparency, he noted that indexing is running into some challenges. First, correlations among stocks have risen, leading to a clustering of returns for many indexes. Plus, sentiment has been against active managers for some time. With investors looking at a decade of flat U.S. stock market returns, many are questioning the value that managers provide for the fees they charge. A contrarian could argue that these are signs that active management could be on the upswing.
However, this strategist doubted that investors, or their advisors, would embrace their inner stockpickers. Most do not have the time or the inclination. Rather, a discerning few will sharpen their pencils and get to work. He suspects their success will simply encourage other investors to hand over their money to the fund manager du jour. But even then, he thinks it unlikely we'll go back to the star-investor craze of the 1990s for the time being. (For those who do want to roll up their sleeves and do the analysis, even though bank advisors don't have the in-house research resources that their wirehouse brethren enjoy, there are other resources available and you should definitely seek them out. Look at the various educational programs or seminars available to you from wholesalers or your third-party marketing firms.)
Another savvy analyst allowed that there are times when active management produces better returns. But he does not believe that we're currently in one of those times. Rather, he said stockpickers are usually rewarded during middle-of-the-road markets when stocks are not all being driven by the same small number of factors.
It is true that stock prices move as a group in times of crisis, and this analyst noted that fear has pummeled shares across the board. That leads some to conclude that active managers bring less to the table these days exactly because markets have been undiscriminating on the way down.
Even one of the bargain-hunting naysayers acknowledges that there is value to be had, provided an investor has a long-term horizon. Stocks represent a good value because they are generally reasonably priced, and there is a long-term risk premium. Plus, markets are pricing in risk plus short-term anxiety at the moment. All that points to long-term value. However, he also notes that some quality stocks have been sold off sharply as investors react to one-off events and ignore real differences between stocks.
Whether you believe it is time to go on a shopping spree or not, the thing not to do is shun an entire continent. And lest anyone think it impossible that investors would shirk back and become isolationists, bear in mind that it's happened before. There was a previous era of globalization before our own. In the early 20th century, stock markets were linked together across the world, according to "A History of the Global Stock Market from Ancient Rome to Silicon Valley" by B. Mark Smith. Driven by the belief that interdependency among economies would reduce the possibility of war, investors drove the total capitalization of the world's stock markets to robust heights in the century's first decade. By 1913, as a percentage of global gross national product, it had attained levels not seen again until the 1980s.
So what happened? With the advent of WWI, the tide turned and the U.S. became isolationist. That mindset reigned for decades.
Behavioral finance experts will tell you home bias and familiarity bias are constant sources of inefficiency. What's more, they become especially marked in times of stress and danger. So when Europe looks frightening, the natural inclination is to avoid it entirely, rather than dig down to look for bargains in an area that feels uncomfortable and unfamiliar even in the best of times. But wherever you stand on the active-passive debate, history teaches us that simply shunning is an inclination best restrained.
For more advice on investments, we have dedicated our first cover story of 2012 to an outlook on both the markets and the bank channel. You'll find both the good and the bad here. The themes you'll see include volatility in the markets and fee-business in the channel. You'll see some worries about payouts getting trimmed as well as reassurances about business expansions. Read it all beginning here.
As always, we like to hear from our readers, so give us your feedback on any or all of these topics.
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