Long-term investors don't use cycles to justify stock purchases. That is, we want to find companies which will perform strongly under any interest rate or level of consumer confidence because our investment timeframe is usually much longer than just one cycle. It's time in the market, not timing the market which is important.
However, the good thing about cyclical investments is that they're relatively easy to see playing out. Just take a look at the following graph.
It shows the share price performance of investment bank Macquarie Group Ltd (ASX: MQG) and fund manager Perpetual Limited (ASX: PPT) since April 1999, versus the S&P/ASX 200 (INDEXASX: XJO). As can be seen, there have been three occasions when long-term investors could have positioned themselves in both stocks at very attractive prices.
Fund managers, investment banks, real estate agents, mortgage brokers and pretty much every financial company does well when asset prices are riding high. From a client's perspective, they witness their money growing rapidly so pile more in, and in the process fund managers claim greater fees on performance and funds under management.
In FY14, Macquarie Funds – the investment bank's funds management division – grew assets under management by 30% to $424.8 billion. The bank is forecasting broadly flat results for FY15 (subject to performance fees and confidence), but I suspect a decent result will come from the Macquarie Funds division. Especially when consideration is given to the performance of global equities markets and a falling Australian dollar, versus the greenback.
But Macquarie is more than a fund manager and being a global investment bank, it benefits from increased activity in corporate and business finance, institutional banking, M&A and more. In the short term, Macquarie Capital, Macquarie Securities and Banking and Financial Services (BFS) divisions are likely to be the greatest beneficiaries of increased capital market activity.
Buy, Hold or Sell?
Macquarie Group is a cyclical business which has grown earnings significantly as a result of increased investor confidence, both domestically and abroad. In the wake of the GFC, Macquarie shares changed hands below book value and on a price-earnings ratio of 12. I'm not trying to time the market, but at its current share price and given how high asset prices are, I find it hard to justify buying Macquarie Group share for the long term.