Global equities are now worth some $85 trillion (£63 trillion), the highest value in history. The ratio of equities to cash held in portfolios is also pretty high as ultra-low interest rates fuel demand for dividend yields.
September was notably the best month of 2017 for continental Europe amid encouraging data and optimism for third-quarter earnings after a generally good second quarter. Meanwhile, reporting in the US and UK remains resilient with no trend to profit warnings despite a creeping sense of caution.
UK bank shares have rebounded amid expectations of an interest rate rise, also retailers on reports that August consumer spending was not hurt as feared as inflation rises above wage-growth.
A chief reason US stocks have advanced again lately is Federal Reserve Chair Janet Yellen saying the central bank may have over-stated the strength of the US labour market and inflation rate, which “could require looser monetary policy” – interpreted as “passing the punchbowl again”.
Meanwhile, Bank of England governor Mark Carney has hinted at an interest rate rise to contain inflation, but this would only be from the post-EU referendum exceptional low of 0.25%, in his terms “a slight easing the accelerator on stimulus”.
Thus, the essential driver of money into equities for yield remains in place until profit warnings jolt consensus. Even then, unless serious inflation manifests, the process of “normalising” monetary policy could be very slow hence the fundamental appeal of dividend yields remain intact.
Markets may consolidate sideways-volatile, but a bear trend… really?
Mind the signs of exhaustion creeping in
Despite updates affirming expectations, prize growth stocks such as Burford Capital (BUR), IQE (IQE) and Purplebricks (PURP) have topped out in the short term – signalling buyer fatigue in this elevated area of the market.
Growth stocks have soared to levels that can’t be justified in the medium term, after momentum traders played “pass the parcel” with an eye on charts.
Such stocks should be contrasted, however, from those on moderate price/earnings (PE) ratios offering a well-covered, say 4%-plus yield, with more chance of sustaining equilibrium of buyers and sellers.
Another aspect is hedge fund managers shuttering funds, given the challenge to produce worthwhile returns. Global macro manager Hugh Hendry has closed his management company as well after 15 years, with net assets down 87% in the last three.
And, while you could say betting on macro trends is hardly stock-picking, the American Whitney Tilson has now closed his value-oriented fund after it reduced to a modest $70 million (£53 million) at the start of 2017. At that size you’d think a capable manager should be able to find enough decent long/short ideas, whatever trend in markets and the economy.
But Tilson’s latest letter asserts: “Historically, I have invested in high-quality, safe stocks at good prices as well as lower-quality ones at distressed prices. Given the high prices and complacency that currently prevail in the market, however, my favourite safe stocks don’t feel cheap, and my favourite cheap stocks don’t feel safe.”
Perhaps his pessimism in part results from pressure on fund managers to perform, otherwise redemptions follow, also fixed costs such as employees and regulatory compliance.
Private investors are free from such constraints: a simpler choice whether to try and time the market, trade stocks or ride out volatility.
North Korea: nuclear tests on 10/18 October?
Potentially disruptive in the near term – also support market advances if no news – is Pyongyang renewing its vow to become “a state nuclear force” despite the US-led effort to impose sanctions.
In response to leaks of how US diplomats are making use of direct negotiating channels to Pyongyang, President Trump tweets: “I told Rex Tillerson that he is wasting his time trying to negotiate with Little Rocket Man.. Save your energy Rex, we’ll do what has to be done… Being nice to Rocket Man hasn’t worked in 25 years, why would it work now? Clinton failed, Bush failed, and Obama failed. I won’t fail.”
The crux, therefore, is exactly what “has to be done” is couched for: psychological pressure (albeit liable to keep the nuclear programme on track) or military intervention and regime change?
Meanwhile, reports continue of North Korean missiles being moved around with a possibility another nuclear test might be carried out on 10 October, which coincides with the founding of the ruling Workers’ Party. It’s also the start of Japan’s election campaigning before a snap election on 22 October.
If Pyongyang seeks to be disruptively attention-seeking, the Chinese Communist Party Congress also gets started on 18 October.
Financial markets haven’t really figured what to make of North Korea as political risk barely features in the trading mindset after so many years’ knowing central banks provide monetary stimulus in response to whatever flares up.
Uninspiring UK political parties
The party conference season reflects a problematic outlook for the UK economy and investment. History suggests Labour governments are overall more bullish for equities than Conservative, due to expansionist policies.
The Conservatives hardly prove investor-friendly. Take George Osborne abolishing taper relief and hiking taxes on dividends, versus Gordon Brown extending taper relief on AIM shares and venture capital.
But, unless current Labour policy is mainly a show of idealism, the prospect of an asset-grab of privatised industries/services with “market value set by parliament” is perturbing.
Amid a manifestly leftwards trend in British political debate, especially on social media, even an establishment economist such as Professor John Kay now asserts “shareholders have no ownership rights” which leftists have seized on. Whereas consensus has been that the basis of a market economy and free society is an effective system of ownership rights.
There’s also growing ideological contempt for business – not helped by occasional examples of asset/dividend stripping of companies actively bought and sold – than respect for the vast tax contributions business makes towards sustaining an annual interest bill near £50 billion on UK public debt.
Jeremy Corbyn is becoming the centre ground as the number of voters recalling Labour in the 1970s reduces.
Meanwhile, scant prospect of a visionary to refresh the Conservatives means a near-term leadership challenge would reduce to Boris Johnson – enough of a liability in his own respects, to many in the electorate.
The party’s response to a lack of appeal to voters aged under 45 appears to be revamping student debt and extending Help to Buy; but it’s hard yet to envisage the Conservatives stemming a rising tide of support for Labour as leftism becomes fashionable again.
Much obviously depends on the Brexit outcome and its short to medium-term effect on the economy, which is holding up remarkably well albeit with record levels of private and public debt.
With markets riding high and political risk rising, capital protection is therefore becoming even more vital a task; ensuring holdings are based on intrinsic value rather than crowd trends, and in due course to consider defensive moves given the possibility of a hard-left Labour government.
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.