Summertime Blues – Which way will equity markets be heading? Brian Tora voices concerns

by | Sep 5, 2017

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 Which way will equity markets be heading? Brian Tora finds it hard to be downright pessimistic as he considers the uncertainties ahead, and suggests that a defensive stance might be appropriate as we head into the autumn.

Well, we survived the summer. Despite having a wild card dealt in the White House and a Prime Minister here in Britain whose control over events is anything but strong and stable, shares have held up pretty well. Meanwhile US markets have been hitting new highs. We’re not exactly shrinking violets here, though much depends on the demand for oil and minerals if the FTSE 100 Share Index is to travel further, such is the nature of market make-up these days.

IMF downgrades

 
 

Actually, demand does seem to be picking up. The IMF certainly believes that the global economy remains firmly on its recovery track, even if it did see fit to downgrade prospects for the US and the UK. You can’t blame them. Just as the forecasts for the euro zone improved now that the political threat has receded with more conventional election results being recorded, so the uncertainty generated by the loss of the government majority here and apparent legislative paralysis across the pond must lead to greater caution over likely economic outcomes.

The currency effect

Much of investor enthusiasm here and in America has to do with the declining fortunes for our respective currencies. At home, a weaker pound is automatically translated into higher profits for an index that earns the bulk of its revenues overseas. In the US, it can only accelerate the transfer of manufacturing processes back to the home country. Neither necessarily results in a stronger domestic economy, but then shares are not automatically tied to GDP growth at home.

 
 

Results season surprises

Still, the results season on both sides of the Atlantic cheered investors, with more surprises on the upside than the down. At home the miners benefitted from better prices for such commodities as copper. In the US, businesses such as Facebook proved they had a global reach and were able to significantly improve their penetration into the advertisement space. We really are in a period of massive change and determining the winners and losers has never been tougher.

Let’s take the automobile industry as an example. In July, we heard that new petrol and diesel engine vehicles are to be banned from sale in 23 years’ time. Really? Pardon me if I sound a little sceptical, but such a massive shift will take some achieving. Electric cars are a tiny proportion of those sold each year in the UK, while finding a charging point is not an easy task, I am told. Still, we must expect a continuing shift towards electric cars and hybrids in the decades ahead, so by 2040 the shape of car ownership across the world is likely to be very different to today.

 
 

Turn and face the strange

This is, of course, very much a long view in terms of likely change, but some change will be with us much more quickly. In particular, how America fares under what is increasingly looking like a dysfunctional White House and the nature of the Brexit achieved – if, indeed, Brexit takes place at all. It will be a rocky ride, I fear, for investors over the next year or two, which is not to say that Armageddon lies just around the corner.

Brace brace?

But I am conscious that the bull market in America has now been in place for eight years, which is getting close to a record. There are plenty of potential triggers that could see investor confidence evaporate. Dotcom bust 2 has been cited as a possibility. Technology companies are increasingly important in US markets and they are not the cheapest shares around. Indeed, the S&P 500 Share Index is arguably overvalued and it seems the bulls have seldom been as bullish as now. It makes me wonder if October, a month when some of the major market setbacks have occurred, might once again deliver some unpleasant surprises.

Geo-political risks

Perhaps the biggest imponderable is the risk of geo-political upsets. Somehow the situation in the Middle East seems no longer to faze investors, but rising tension on the Korean peninsula would be a different matter altogether. Once again it is the unpredictability of the new President which makes assessing likely outcomes that much more difficult, while an increasing influence from the military in the US is hardly likely to soften their approach.

So I enter the autumn in a cautious frame of mind. While the UK market does appear less vulnerable from a ratings point of view, such is the nature of investment sentiment that a sell-off in America is bound to have repercussions here. I find it hard to be downright pessimistic and sell regardless, but a more defensive stance does appear appropriate. Let us hope that, as we often do, we somehow muddle through and avoid any big upsets.

 

 

 

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