A decade after Lehman Brothers failed, what do managers think about banks?
On Monday 15th September 2008, I remember walking into the office, not knowing quite what to expect....
The Ides of March have come and gone with no significant change in fortunes for investors in the major equity markets. However, the warning signs are there for those prepared to rummage in the mess of data, propaganda and alternative sources showing the true ‘health’ of the global economy.
We take a look at the key events you need to know about, region by region, in April.
Theresa May has sent the EU a six-page letter triggering Article 50. One line would have sufficed and preferably have been delivered nine months ago. Obfuscation and delay has already begun, with Brussels stating trade agreements will be off the table until the exit strategy has been concluded. As they are in sole charge of the timetable of events, don’t hold your breath waiting for any kind of outcome, hard, soft or otherwise.
Sterling is still very weak but has traded sideways for six months now. A break below $1.20 would be ominous, above $1.27 would almost certainly require a rate rise here and dollar weakness, both of which seem unlikely – although never rule out anything in forex markets! The oversold position reached last October is now fully unwound so we are at an important juncture.
In the US, the president has come up against his first immoveable object in the stance taken by the House and the Senate to deny his aspiration to “reform” Obamacare. While the Republican party has majorities in both seats of government, the president is not regarded as a republican by a significant number of congressmen and senators. His bill was pulled when it became obvious that he would not have sufficient votes. Next up will be tax reform, which will more than likely receive the same treatment. The index of stocks that would benefit from tax cuts (there is an index for everything and anything these days) rose sharply on the election results, but has now given back all the gains and more. As is so often the case, election promises end up in the dust.
As for market valuations, the S&P 500 currently stands at a CASE Schiller (inflation adjusted) price / earnings ratio of just under 29 times – the third highest in history, surpassed only in 1929 and in the run up to the tech bubble in 2000. If this level were sustainable then you would expect company earnings to be rising, but since last September exactly the opposite has been happening. Further, bond yields continue to be artificially suppressed by the aforementioned bankers so the traditional home for cautious investors is closed to them. I continue to believe that reducing risk and focusing on preservation of capital is sensible in this environment, despite the apparent shortcomings in the near term. The bullish consensus is not yet complete and I can’t rule out new highs in the UK and US stock markets, but I do believe a significant correction is increasingly probable.
This month, somewhat ironically on St George’s Day, the French hold the first round of the presidential election, which Marine le Pen is expected to win. The odds on her overcoming Macron in the second round in May are currently 20% – the same as for a Brexit outcome and a Trump presidency at a similar time. Perhaps it will be third time lucky for the bookies?
The Nikkei continues to trade sideways, with upside progress for the time being capped by a rising yen. The latest US rate rise was deemed to be a ‘dovish’ event and the dollar weakened. Once the market gets to grips with the likelihood of at least two further rate increases in 2017, dollar strength will be back and the Nikkei might make it past 21000.
Potential dollar strength and the threat of Trump mercantilism are the danger signs for these markets, but the trend is still up and the emerging markets index has made an encouraging series of high lows and higher highs.
Longer term, the growth potential relative to western markets is significant but, as I always reiterate, in any ‘emergent’ market, tomorrow’s winners wont be those of today. These are markets where active managers are a must.
The crude oil price is always susceptible to news of increased output and the US shale plays provided the impetus for a sharp fall at the start of the month, but US$50 has become an important support level. A break above US$57 is the next hurdle. Gold is enjoying another gentle rally, again buoyed by the uncertainties about just where the US is headed in terms of trade, immigration, interest rates, foreign policy, in fact pretty much everything. A move above the 2016 high of US$1375 would be very good news for the gold bugs.
It is still early too early call the end of the 35-year bond bull market, but the warning signs are there. The downtrend in yields since 2010 has clearly been broken to the upside and after such a significant move, a period of consolidation is normal and that is exactly what we have seen. If rates stay above 2.3% then the next move will be to 3% as a minimum.