Looking back to the start of this year (when the UK market was 5% lower than it is now), now in early March, it serves as a keen reminder of how powerful the effect of sentiment can be on investors. And of how quickly scares can fade from the memory. What has caused the mood to swing?
US Confidence at 17 year high
The US economy remains robust with consumer confidence hitting a 17 year high. Wages continue to pick up and reported company earnings remain strong, reflecting last year’s tax cuts and consumer confidence. The Federal Reserve chairman Jerome Powell has soothed nerves by stating his belief that the next few years will be good for the US economy. He also went as far as to indicate that the Fed will be patient raising interest rates, given that inflation remains low.
The postponement of tariffs on Chinese imports by Donald Trump has also further supported US market sentiment, and seen the S&P up by over 16% from its December low.
The Sterling see-saw
At home, Brexit continues to dominate the news with the Government working hard on the Irish backstop (or Good Friday Agreement Guarantee, if you like). The political machinations are too complex to predict an outcome. Every movement in our domestic indices has to be seen from the perspective of whether Sterling is strengthening (on improving prospects of a deal) or weakening (when negotiations have hit a snag or the politics gets fraught).
Brexit or no Brexit, our key trading partner will remain the EU and so trends developing in the underlying European economy are of great importance to us.
A lack of ‘vorsprung durch technik’ ahead?
On the far side of the Channel, the German economy only grew by 1.5% in 2018, down from 2.2% the previous year. Germany is an export oriented economy and therefore any slowdown in world growth, specifically China’s, is bad news, for the Germans and for Europe (China is expected to overtake the USA in GDP terms within five years). Germany has the largest economy of all 19 nations in the euro bloc and any slowdown doesn’t bode well. Concerns are for the future of the pre-eminent German car industry with its reliance on diesel, in the context of the long term move to electric vehicles. Politics in France and Italy remain problematic, of course.
A delicate decade ahead
Improving sentiment is unlikely to carry markets much higher, just on its own. The world’s store of accumulated debt has doubled in the loose monetary climate since the financial crisis in 2008.
The OECD has warned that slowing economies, in particular China, and rising interest rates, will make it harder for companies generally to service, repay or renegotiate their borrowings. Difficulties in the bond market would be a potentially serious threat to confidence in equities. Central banks may find themselves paying as much attention to the cash flow statements of major corporate firms as to data on inflation, employment and growth.
Nursing the world economy through the next decade will be a delicate and complex challenge.
The above article was previously published by Parmenion on 8th March 2019