Wednesday 21 February 2018

Time to get a grip on uncertain markets and take stock of investments

Traders work on the floor of the New York Stock Exchange
Traders work on the floor of the New York Stock Exchange

John Lynch

Stock market investment is a tricky old game and there is 300 years of history to prove it, and many bubbles.

The end of the year is the usual time to take stock (no pun intended), but getting a realistic grip on markets in their present uncertain condition demands Solomon-like skills I only wish I had. There are so many big calls to be made.

I have highlighted in this column the challenges and opportunities of major corporations with a global footprint (Nestle, VW, and Diageo), and the scope to be relatively unburdened by a downturn in any single market.

But, of course, there is one stock market so influential, so pervasive, it is bound to impact upon most of the shares we like to look at.

That is, of course, the US stock market (Dow, S&P), which up to recently had become perched so delicately that its future was taxing the brightest forecasters.

Since the 2008 bust, which we are only too painfully aware of in this country, the central banking authorities have been fighting the chances of deflation in the American economy by resorting to the printing press.

Economic history students will remember that deflation was the reason for the Great Depression that enveloped the US and the rest of the world in the 1930s. It is also the reason why it lasted so long.

The weapon used by the Americans for the past five years to counter deflation was quantitative-easing, or the massive purchases of American bonds at an enormous $85bn a month. This had the effect of keeping interest rates so low they barely created a notch on the graph line.

This was music to the ears of the markets that tipped along, scoring newer and newer all-time ‘highs' (Becton Dickenson, Johnson & Johnson, Estee Lauder) as the cost of funds ceased to be a worry.

However, that sort of life-support cannot continue forever. Last May the chairman of the US Federal Reserve Board, Ben Bernanke, warned the support would be slowly phased out or tapered. Just before Christmas he announced what the tapering would be. In fairness, it has not frightened the markets to death so far. Analysts are prepared to accept that when US quantitative easing ends, probably towards the third quarter of 2014, interest rates are not going to sky-rocket.

But it has been an extraordinary and enormously expensive experiment. It is estimated that a staggering $3 trillion has been pumped into the US economy in the last five years, and it is still not certain that Bernanke pulled it off.

Calling a halt to an era of easy money can have all sorts of repercussions. As interest rates remained low, mobile funds sought out high yielding investments. They found a home in emerging markets and in currencies like the Turkish lira and the Brazilian real.

Now that the plug is being pulled, uneasiness abounds. Just how these jitters are justified will only become clear towards the end of the year.

And we know, to our cost, in Ireland, a sustained era of low interest rates can also produce asset price bubbles in the most unexpected places.

I would be very cautious about equity prices internationally in light of the withdrawal of quantitative-easing, and when I look at investments in the coming year, I am going to put my trusty pocket-calculator to good use.

I also have another concern.

Looking at the 50-odd global companies I have written about in the past year, many are flying along at record price levels.

That is not necessarily because they have been more productive or more efficient. Many of these firms have embarked on substantial buy-back programmes, (BP, BSkyB, British American Tobacco), which in my opinion is an artificial way of stimulating earnings per share.

I am an old-fashioned believer in productivity, investment in plant, R&D, technology, and share buy-backs don't always do it for me.

As for next year, after the continuous upward trend in equities over the last five years, and a particularly good year in 2013, will it continue?

Analysts in the US are positive and predicting a rise (10pc) in 2014, citing a stronger US economy and better corporate profits. I am not too sure.

John Lynch is a former chief executive of Bord Gais. Nothing published in this section should be taken as a recommendation, either implicit or explicit, to buy or sell any of the shares mentioned.

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