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ANALYSIS: Harness ‘animal spirits’ for investment success

Not being a student of Keynesian theory, I’ve been somewhat confused by the oft mentioned revival in ‘animal spirits’. Rather than bulls and bears, investors should beware the headless chickens.

Reading further, I learn we’re actually talking about the very human emotions that drive consumer confidence, namely fear and greed.

It’s something that any investor who’s lived through a few market cycles will have a strong view on, though that doesn’t mean they necessarily know when the wheel will turn again.

It is the US where those ‘spirits’ appear strongest. In the eighth year of an equity bull market – with the S&P 500 having delivered a quite extraordinary 330% since the lows of March 2009 – there’s reason to believe the ‘greed is good’ Gekkoism has won out.

Of course, others will claim this rally hasn’t quite worked that way. After all an industry that now prides itself on the foundations of targeted return and risk-rated funds is nothing but the embodiment of the ‘cautious optimism’ mantra that’s held sway ever since the dawn rose after Lehman’s fell.

For fixed income, the good times go back even further – though, like a proud lady of an unspecified vintage, the long-running bond bull market never seems to age beyond 30.

Nick Gartside, international CIO of fixed income at JP Morgan Asset Management, explains how he is harnessing optimism in terms of his exposure to US high yield – 26% of his JPM Global Bond Opportunities Fund – where he believes defaults will fall.

“There is a lot of optimism in the US through lower taxes, through an expectation of deregulation, and policies that are business friendly, and rate hikes for the right reason,” he explains.

“I’m a big believer in animal spirits driving economies because the reality is economies are collectives of us. Modelling our individual behaviour is a nightmare, and as consumers we all do very irrational things.”

 

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