Equity markets stay strong despite economic uncertainty
- 6 January 2013
- From the section Business
Of all the sayings about the markets, the one about them hating uncertainty has always struck me as the oddest.
What makes a market, after all, if it's not the uncertainty of prices? If everyone was certain about the value of MegaMiner's stock, the market in the aforementioned shares would cease to exist.
Ah, you say, it's not that sort of uncertainty.
So perhaps it's uncertainty about, say, the currency (euros) or budgets (America, Spain, Greece, Italy... etc etc) or elections (Germany, Spain, Italy etc etc) or just growth (everywhere) that markets hate?
Well, in that case why did Greece's stock market rise around 30% last year? And why did the main index in Venezuela, faced with elections and a virulently anti-capitalist president, rise around 300%?
Actually, it's hard to find any market that fell - apart from Spain, which barely changed. Barely changed! In its worst crisis since the civil war, with unemployment at a quarter of the working population, the Ibex sailed on as though nothing has happened.
With so much uncertainty - why is there so much confidence?
Much of this is a direct result of Mario Draghi's promise on the 26 July to "do whatever it takes" to support the sovereign bond markets.
Actually that expression had been used several times before by numerous leaders. It was the insistent "believe me, it will be enough," that did the trick, sending yields on Spanish two-year debt down 72 basis points to 5.47% in barely an hour, with comparable moves on Italian debt.
That then fed into the stockmarkets - the MIB index of stocks in Milan surged by 5.6%, while Madrid rose 6%, the biggest jump in two years, led by an explosive rise in bank shares.
Venezuela's out-performance is largely down to the morbid reason that investors are hoping for the death of Hugo Chavez. Combine that with the president spending cash like a drunken sailor on social housing in the run up to his successful election, and you get a fine environment for adventurous speculators. Don't bank on a repeat performance though. Lower oil prices, a currency devaluation and possibly a budget crisis are all possibilities, not to mention a change of government.
On the subject of brave investors - hands up who put money into the Athens market. Well, I have nothing but admiration for you. If you did put in $1,000 you have my heartiest congratulations, and you deserve every last cent of the $430 that you made (as against the 430m drachma you might have made).
Justin Urquhart Stewart, director at Seven Investment Management, says investors concentrated on the German (up 25%) and French (up 15%) markets, where companies were still doing well despite the slowing macro-economic numbers.
'When not if'
As for the coming year, he believes a lot depends on the German elections - "if growth is fairly flat," he says, "Mrs Merkel will have to come out with some growth policies to win over the electorate, and that will mark a move away from austerity".
It will also mark the end to the boom in the bond markets which, says Urquhart Stewart, "is a matter now of when rather than if".
The fudging of the fiscal cliff issue means there will be a few more crises to come in the US, but Friday's employment numbers suggest that the economy is heaving itself back on its feet. The continuing quantitative easing (QE) programme has been thrown into some doubt by last week's minutes from the Fed Open Markets Committee.
But Mr Bernanke has said unemployment has got to come down before the central bank takes its foot off the gas. How low it has to go before the third round of QE is pulled is not certain, but most people believe it's not going to stop while the jobless rate stays above 7% - it's now at 7.8%. It's an uncertainty investors have proved they can live with.
Even so, few believe the US recovery will be dramatic; but others are recommending investment opportunities in countries that might profit from even a mild US return to growth.
Stephen Pope, managing partner at Spotlight Ideas, pinpoints Mexico, which since 1994 has been reformed by the NAFTA free trade agreement.
It lost out to China ten years ago, but has regained its competitiveness against its Asian competitors. Wages in Mexico have risen 39% since 2000, while those in China are up over 400%. Mr Pope writes: "Mexico's factories, its financial sector and even its oil and gas fields look set to expand and generate a strong growth decade for the economy.
"[It] grew faster than Brazil in 2012 and in 2013 we see the same feat being delivered."
It's not just trade with the US that looks promising. Mexico has more free trade agreements in place than any other country, which could reap huge rewards if partners such as Germany, the US, possibly the UK, and even Japan, shed their hair shirts and finally go for growth this year.