Howard Wheeldon on where world markets currently stand and the troubles ahead for the UK economy
Not yet it seems! For someone who constantly reminds of the necessity to listen to markets and that one ignores what they say at one’s peril, I readily admit to having some difficulty explaining recent stock market euphoria. Unjustified it may be, but given the global nature of the current perceived recovery it seems that any global equity market correction may still be some considerable way off.
Take events in London yesterday for instance. Led as usual by the miners and banks, the FTSE100 ended the day almost 2% ahead to 5355.5 points, just short of being the highest that it has been this year. Sure, even in the UK, things may be a touch better than they were at the beginning of the year when the FTSE100 stood at just 4639 points. And they are certainly better than they were back in March when the FTSE100 reached its lowest point for the year at just 3460 points. But even if the anus horribilis of the 2008/9 banking and financial market catastrophe really is now over and even if one can say with a degree of safety that the ‘global recession’ is also over and that a complete collapse of the global financial market systems has been avoided, my guess is that in a few more years time market historians may well be recording the period that some countries such as the Britain are about to enter and endure may be amongst the most economically troubled since the mid 1970’s. That scenario though, whether proved to be true or not, will have far less bearing on the UK equity market than it did back then.
Following on from overnight Asian market declines it came as little surprise that European markets would open down today. So they did – led, as almost always, by miners and banks and made a touch worse in London by Lloyds Bank confirming as expected a deeply discounted 1.34 for 1 share rights issue with a unit stock price of just 37p. Even so, at the time of writing the FTSE100 has in percentage terms fallen less than the CAC40 in France or the DAX index of leading German stocks. Is there something about the air in London perhaps? I have no answer to that although I can say that as mining stocks represent 13% of the FTSE100 index and that as we can find within this a collective argument to justify at least some of the more recent market euphoria, mining stocks are a mirage for global demand expectations. If markets perceive ‘global’ aspects of recession to be over they will fly to the naturally acceptable perception that global demand is also bound to rise. So be it, but none of this explains why the price of gold has been going through the roof except to suggest that as gold is perceived as a natural hedge against rising inflation one might well deduce that markets believe rising demand will in turn create rising inflation. So markets aren’t quite so daft after all then! Gold is a currency barometer of course and, just like oil, if the dollar goes down then the price of gold will automatically rise. Moreover, if the dollar is perceived by bullion markets as likely to continue falling then one can assume that the price of gold will rise in proportion. True, speculators play a huge part in the price momentum of both oil and gold and it is likely also true that as the world’s largest buyer of gold the Chinese also have more than a finger on the pulse controlling the price.
What about the rest though – might UK equity market participants be mad to ignore the huge and very specific mess that the UK economy amongst a small handful of mature market economies really is in? YES. OK, as I look at the FTSE100 page all that I can see is a glowing beacon of red. Following the euphoria evident in recent daily stock movements this may be reassuring to those that had been looking for a correction for weeks. And yet it is also probably true that today’s downward market momentum has not been built on rock and stone meaning that we might well see the index ahead by the end of the day.
I have no need to remind readers of the very specific problems that the UK has over and above others, apart from using the words ‘national debt’. Nothing to do with the upward market momentum witnessed yesterday [this being partly down to surprisingly good US housing figures and higher commodity prices] but the political speeches to the CBI conference yesterday from Messrs Brown, Cameron and Clegg gave more than enough credence as to why we should be very concerned about the outlook for the UK economy. Cameron spared no punches at all saying that Britain was effectively bust and that there would, if the Tories won the election next year, be a plan in place within 50 days that would tackle the need to pay down the deficit. Conversely (or should I say perversely, perhaps?) it seems that Prime Minister Brown was essentially promising more of the same – there would, he said, be no turning off life support prematurely. In other words before the election the message from New Labour is that they will spend their way out of this crisis, paying only lip service to the eventual £1.5trillion national deficit.
Just as his finance spokesman Vince Cable appears to have done frequently of late, the Lib Dem leader Nick Clegg appeared to lose the plot as he stressed that tax reform is one answer to the recovery plan and that placing even more regulation in the way of the very banking beasts that we need to pull us out of this mess will solve the problem. I think not!
I will now slowly return to the original question posed – that of whether we should anticipate a large correction in global stock markets or maybe just a whimper. The short answer to that is that while I put my hands up to having said that we needed a correction back in October listening to markets suggests to me that we may only find that what we eventually get will be a mild bump. That’s what markets appear to be saying and who am I to disagree? Even if I could easily reason why equity markets are now 15% over the top. So, no big downward bump that will smash Humpty Dumpty to pieces, even if, as I suspect, the UK economy fails to respond to treatment in 2010!
Nevertheless, it probably does have to be said that if business is concerned about the rising level of public borrowing [Mr. Cameron pushing the point that this was up 88 times on this time last year] and also that stimulus taps should not be turned off, and if they envisage a worst case scenario of no clear mandate being given to Tory or Labour at the General Election next year, it is high time that markets got in on the act. Thus, notwithstanding what I said above, I suspect that both UK and US equity markets will be far more volatile in the months ahead.
Clearly, at this stage, just six months ahead of the likely date, we might like to think that we know what the eventual election result might be. The trouble is that having thought that we did it seems that the old saying ‘I used to be uncertain but now I am not so sure’ has come into play and that the possibility of an outright Tory victory, although still likely, is less visible than it was say three months ago. No room for complacency then. Meanwhile, Mr. Brown harped on about creating growth (without saying exactly how) at the CBI yesterday. He showed contempt all the way through, little more than despising those that would dare talk common sense saying the way forward is about massive government cuts. One thing is for sure: without severe public sector cuts there will be no growth in the UK economy and no new round of job creation – just years and years of further contractions. In the meantime, while they all decide that despite a slowing down of economic malaise and despite some apparently beginning to have a better feel good factor and despite shops looking somewhat busier, the UK economy remains a root and branch disaster area as we look at it now. It isn’t just debt and paying down that deficit of course – it is also the fear of big time inflation appearing again here if the rest of the world begins to enjoy a demand led recovery. Add to this the ridiculous status that has emerged of our probable inability to ever again balance our trade with the rest of the world meaning that we now need to import a very high proportion of what we need with little to compensate in export reverse. What a sad nation we are. Yet at the heart of the system we do still have great strength in banking (yes, that which the government wants to kill off by over regulation), in defence and specialist engineering, and in pharmaceuticals. Not enough though and no matter who wins the election these guys alone are no longer strong enough to pull us all the way through. What struck me most yesterday was that none of the party leaders talked about the necessity of investment other than Mr. Brown coming up with some words designed to be picked up by the media saying that we need to encourage foreign investors to invest here in the UK. Why on earth did not one party leader talk about providing incentives for British based companies and entrepreneurs to invest in new ideas, developments and technologies that can create new industries here in the UK. Not a word, yet note that they are all quick to have a go at the banks – the very ones that are needed to provide the funding while all three men bemoan there is not enough lending.
Should markets be more aware of the deep seated problems that may well be more specific in this context to the UK alone? They should but then with maybe more than half the wealth of FTSE100 companies invested in overseas subsidiaries perhaps it is also justified that less credence is placed on the UK and more on the rest of the world. You pay your money and take your choice. So what is my message? Stock markets may be due a big correction but they may just only get a half hearted one. If so then rather a lot of UK stocks may be regarded as more than fully valued. So, my message is simple: look east young man, look east and not just at China and Japan either – don’t forget to also cast an eye over India.
By Howard Wheeldon, Senior Strategist at BGC Partners