Here are two short ramblings from discussions I have had recently on the market action and investing pension assets in Bermuda.

Melt-up

The S&P 500 is levitating nicely. To many I talk to there is some confusion and dismay. They read all the negative press surrounding the political situation in the US and the negative earnings growth being posted and would assume the market should be trending down, not up.

It’s worth noting, however, that markets trade not only on fundamentals, but also sentiment. You can have negative news and the market trades higher because prospects, on the margin, look like they are getting better or sentiment, on the margin, improves.

Note that markets are not necessarily set by absolute values, but the direction and magnitude of change. The recent situation is likely a combination of these two changes.

First, the trade war situation, Brexit and global growth prospects appear to be “less dire”. This doesn’t mean they are resolved, and the coast is clear. It just means the market is factoring in a less abysmal outcome.

Furthermore, sentiment was poor to begin with. The Barron’s Big Money poll taken on October 25 was horrible. Only 27 per cent of money managers were bullish at that point for the next 12 months — this is the lowest reading in more than 20 years and even lower than in the depths of the Great Financial crisis of 2008-2009! Nearly one third of professional managers considered themselves bearish.

When everyone is this negative and the news begins to get “less bad”, markets tend to trend positively. My biggest concern is that this recent rise feels a bit like a FOMO rally — Fear of Missing Out. Sentiment has now actually turned rapidly with some global surveys showing that economic sentiment is rising while earnings outlooks have deteriorated to some extent.

Investing

There seems to be some confusion surrounding how investing works. Let me try and clarify one point.

Money invested from pensions and or savings generally does not directly create jobs or become a source of cash for the company you buy. Nor does the company you buy necessarily care.

The primary market is where companies issue stock to fund operations — think of an initial public offering. In this case the investor is funding a company. They are giving the company cash in exchange for equity.

Allocating money to an existing company currently trading does not provide the company with capital directly. It is simply a transfer of capital.

Let me use a quick example: let’s say Joe takes his savings and buys General Electric stock. Joe is not “funding” GE, nor does GE necessarily care. He is not “investing in America” or funding investment for GE. He is simply buying stock from another investor who gets the cash. If that investor is in Germany, that investor now has cash and Joe owns some GE shares.

All we have here is a reallocation of savings and a shifting of cash. Thus, unless you are investor in an IPO, you are not really funding a company and you are just purchasing shares from another shareholder.

The key to investing, then, is to generate the best return for your desired risk level. Therefore, you as an investor should be agnostic to domicile and be searching for investments that align with your risk and return objections.

When someone tells you that all your pension money is funding jobs or growth abroad, they are not really telling you the truth. Your pension assets should be invested as noted above, in the best returning assets for your risk profile.

If you desire to invest in a start-up or a business in Bermuda that’s fine, but don’t believe in doing so that you are “unfunding” America to bolster Bermuda.

More importantly you will need to consider the risk and return implications of doing so. This is the paramount consideration. If the investment returns, options and risk are less than optimal compared to alternatives you will need to seriously ask yourself why you would do it in the first place.

We should all be allowed to invest in Bermuda when the conditions make sense and not under prescription or mandate. It is the carrot and not the stick that counts. If we want more capital to flow to local investments, then we need to offer attractive opportunities and an investing climate that is more attractive than alternatives.

We also need to ensure that the choice to invest is only an option and not a prescription — whether it’s government pensions or private pensions.

I also think we need to have some guard rails on how much is removed from pension accounts, so a poor investment does not materially and adversely affect one’s potential retirement outcome.

• Nathan Kowalski CPA, CA, CFA, CIM, FCSI is the chief financial officer of Anchor Investment Management Ltd. and can be contacted at nkowalski@anchor.bm

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