Becalmed markets will force some fresh thinking, says Peter Brown
It’s been something of an interesting year in the markets so far. Big stories have dominated: the outlook on inflation, and the whims of President Donald Trump. But otherwise market stories have had limited effect.
Brexit has been dull and boring and the eurozone has generated less heat, though Italy could still return as a huge problem.
Traditionally markets went in one direction. From March in 2009 to January this year, the S&P 500 index climbed by around 300%. The dollar fell 20% in value from March 2017 to February this year.
We had become accustomed to sharp price movements and asset appreciation over the last decade, and investors rely on such price movements to secure decent returns.
It all looks a lot different this year.
The S&P 500 is only up slightly since early this year, while Frankfurt’s Dax 30 is down by less than 2%. Gold is unchanged, while silver has fallen by over 3%. Meanwhile, the euro is up 4% against the dollar and up 1.8% against sterling. Clearly, we are directionless.
The big stories have no follow through. Inflation, which many think is coming, has not arrived in reality, so the expected sell-off in equities has stalled. The President Trump stories on trade wars and Korea are not moving markets. Despite early February wobbles, nothing much has changed this year.
This is a challenge to the investing community who were used to double-digit stock returns. And the odds are we are unlikely to see big gains this year. That’s because the large US big stock market leaders are seriously overvalued and a healthy correction looms.
That’s bad news for almost everyone, because one way or another Irish funds are likely to be exposed to the big American stocks.
And those modest market gains this year will likely to have been eaten up by investment manager charges.
The US market is sensitive to bad news. The slightest hint of inflation is going to cause sharp selling there.
Back home, if you have ever wondered why you get no return on your savings, look no further than Italy. If interest rates were ever to rise in Europe, Italy would be Greece.
The Italian economy has hardly grown at all since 2009 and youth unemployment runs at 40%. Its debt pile is more than 130% of annual economic output and the country is still involved in bailing out banks. This pallid performance is in an era of quantitative easing, extremely low interest rates, and a competitive euro exchange rate. Is there any set of economic conditions in which Italy can thrive?
For the next decade it is highly unlikely we will see deposit rates in Europe, after Dirt tax, that beat inflation. For now, European markets are pretty calm, despite the Italian worries. We can rely on the ECB’s Mario Draghi to maintain a regime of cheap money.
But I think it unlikely Italy will implode, because there is too much at stake. Also, I do not see a risk of a global recession in the near term, or in 2019. But markets remain directionless, which means that investors will likely lose money.
There are opportunities: Some bonds and commodities for example. How far will the dollar rally if the Italian situation worsens? Is sterling too cheap? What about emerging market yields?
These are investment themes worth pursuing, but it means being a little more pro-active.
We are not going to make money on deposit that is for sure. That does not mean we have to dive headlong into the equity market and ride out a storm as some are suggesting. We have ridden a wave since 2009 but the next five years may be a time to be a bit more active.
Peter Brown is founder of Baggot Investment Partners www.Baggot.ie