The last few weeks have been pretty mad in the markets and I wondered what your views are for the coming months ahead?
It has been ‘pretty mad’ as you put it. Few weeks in the last thirty years have been as incident packed. Last week for an investor must have been like a Western bar room brawl with everything that could be grabbed, thrown around the room. The savvy investor shouldn’t have been forced into a knee jerk reaction and awaits the moment in which he can lift his head again, in the meantime reducing risk by cuddling into a safe spot and enjoying the fun. There are plenty of fundamentals that support the problems we have now and that of course has turned to sentiment with some values being forced below where they should be.
We know that the US has reduced its interest rates very aggressively and is focusing on a 2008 recession and no longer – good news. Their timing has been poor and this should have been completed some months ago. The reason for the timing comment is that the benefit of the rate drops will take up to eighteen months to have their true effect, but the aggressiveness of the rate drops should provide positive sentiment in the short term.
Over the next few months there will be a to-ing and fro-ing of the benefits of the rate drop versus potential worsening economic data. Expect fluctuations.
The greater issue is that European banks and the Bank of England do not have the luxury of simply dropping rates to provide that stimulus. They are caught between the rock of inflation and the hard stone of an economy in recession mode. The monetary policy committee has stated that the short run inflation problem has worsened. The committee has concerns the consumer will acclimatise to inflation at this level, so has chosen to keep rates at their current level even though we are on the brink of recession.
Moreover the vote wasn’t even close. They voted 8:1 to keep rates at their same level which shows their commitment to focus on inflation rather than boosting the economy. Mervyn King has made it clear he may well have to write to the chancellor of the exchequer on more than one occasion this year to explain why he hasn’t hit his inflation target, and has said he believes the UK may need to ‘tough it out’. We can therefore expect rates to remain close to current levels until inflationary pressures abate.
All of this does not bode well for retail and spending which took a hammering at Christmas. Therefore if not handled correctly we could easily find ourselves in a full blown recession. If companies aren’t making money, they naturally have to revise their profits. Their profits are all forecasted into the distance and subsequently priced into the current share price, so volatility explodes.
In many ways it’s like a ship setting out with correct coordinates which ensure the correct destination. However, poor wind, currents or rough seas knock it off track one or two degrees, so instead of Brazil, we land in Greenland – not so great in a bikini. So much of the volatility today is based on a lack of true information. Because there is opacity and confusion and we can’t see behind it, there has been an offloading of some assets until this confusion clears. It may be the truth is better or worse. When the information is more transparent the market will react quickly, thereby leaving those who were disinvested out on a limb.
It is very difficult to call now but it’s easy to see that it’s best to be clear of certain corporate bonds as well as a lowering of exposure to Asia and its banks. Market prices today are reflecting a considerable downturn in 2008 and no upturn in 2009, if this doesn’t happen equity prices look very cheap so consider a drip feed of capital into the market.
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