Anyone struggling to work out where markets and the economy are headed at the moment should take some comfort from the fact that the world's most powerful central bankers are dithering too. While there is little doubt that the global economy is improving, we are still very much grappling with the after-effects of the financial crisis. For the policy makers who set key economic prices such as interest rates, the input data has been mixed, posing the question of whether we are truly on our way out of the downturn, or whether the recovery is yet to find its feet. The answer will drive stock markets in coming months.
At home, this lack of direction is very evident. The British economy expanded a healthy 0.7% in the second quarter, providing a fillip to a Chancellor and Prime Minister who have strongly backed a strategy of getting Britain's finances in order as a prerequisite for a recovery. At the same time many people remain unemployed, and even with all the talk of austerity, Britain retains considerable levels of debt. A recent report highlighted the existence of 'zombie' companies, surviving only because interest rates are so low and because government-controlled banks are finding it politically difficult to speed up the foreclosure process.
On balance, we are cautiously optimistic on the UK's prospects. One reason is what's happening across the Channel in Europe where 50% of Britain's exports go. The possible demise of the euro – an obsession amongst financial pundits a couple of years ago – seems to have disappeared from the radar of most investors, and in that space Europe's struggling peripheral nations have been quietly rebalancing their economies. Exports in Spain for example are expected to increase 4.1% this year, while the country posted its first monthly trade surplus on record in March.
If Britain is beholden in some ways to the fate of Europe, then the world is subject to the prospects of the world's two economic monoliths – China and the US. A recent trip to China confirmed our view that while economic growth is slowing, the rate is falling to a more realistic, sustainable level. This bodes well for consumption in a country of more than a billion citizens, prospective buyers of goods and services from the rest of the world.
However, the one country that really can dictate our economic fortunes remains the US. The debate stateside about when to rein in some of the extraordinary measures deployed to help lift the economy out of its morass is still the only real question in town. Speculation earlier in the year that the Federal Reserve would taper some of its quantitative easing (reduce the amount of money it's pumping into the economy) helped start a flight from emerging markets, while also making a mockery of Bank of England Governor Mark Carney's promise to keep interest rates low – once traders thought US rates would rise, so markets here started pricing in an increase in interest rates. However, in September the Fed balked at starting a tapering process amid mixed messages, with house prices rising and consumer confidence slipping.
At Tcam we strongly believe that the recovery process is underway and, as a result, there is considerable value to be found in equity markets around the world. We are also aware however that there will be bumps and troughs along the way. The market in general though seems resigned to a wait-and–see approach, hoping for a continuation of the Goldilocks scenario where the data is not so bad it means we are still in the midst of a downturn, but not so good that it prompts the Fed to rapidly withdraw the stimulus that has kept the economy afloat for the past five years.
This article appeared in the SCRUM Magazine Issue 56
This content was generated prior to Turcan Connell Asset Management Limited operating as Tcam.