The worries have been well flagged – interest rates in the UK and Europe as a whole on a trend northwards, increasingly less likelihood of a cut in rates in the US, a jump in the US volatility index (or “fear gauge”) suggesting risk-aversion and a move away from the riskier asset class of equities.
A general rise in interest rates would eventually impact on the strong corporate earnings which have become a feature of recent times. In addition, the economy as a whole would slow and, since money would no longer be as cheap, there could be a negative effect on Merger & Acquisition activity, which has been another pillar for global markets over the last couple of years.
On top of these fundamentals, a well respected house issued a note earlier this week suggesting that based on their calculations, a “full house” sell signal was being indicated for only the sixth time since 1980. Unfortunately for the bulls each of these signals on previous occasions has resulted in a following six-month fall which has averaged over 15%.
So, the question is quite straightforward, even if the answer is not – is the glass half-empty or half-full at the moment?
There is no denying the fact that some of these signals are of concern. Equally, of course, as we have seen many times in the past, no solitary set of figures, or data, can be taken in isolation as the ultimate pointer to what happens next. At any given time the market is looking to the future, not the present, and making a judgment on how that future might look. The current unease may or may not come to fruition.
In terms of quality, blue-chip companies, are they any different today than before the recent markdown of prices? Almost certainly not, indeed there have been very few signs in the UK at least that corporate earnings are under pressure. Many of the top UK companies are and will continue to benefit from strategic and geographical diversification and this increasing globalization augurs well.
And of course these corporate earnings continue to generate excess capital. This has resulted in a flurry of share buyback programmes, which in theory increases share scarcity (and therefore value), as does the removal of quality companies from being listed at all, via a takeover for example. Quite apart from the ability of companies to use this excess capital for acquisitions, we seem some way away yet from private equity houses turning their backs on buying opportunities whilst cheap borrowing remains available.
One final point which may be worthy of consideration. Whilst indices per se have a limited value – it is, after all, the underlying companies in which investors are generally interested – they can, nonetheless, point to trends. The recent strength of the US market, deriving largely from a robustness of the economy which surprised many onlookers, has resulted in a gain over the last three months of over 10% for the Dow Jones, and nearly 9% for the wider S&P500. During the corresponding period, the FTSE100 has managed to put on just 6%. It has not slavishly followed the US market on the way up.
Does this mean that there is actually some downside protection for the UK market?
These are interesting times indeed for global markets. There will always be room for the adage that it takes two views to make a market. Whether this particular economic cycle is nearing its end, or whether the global economy is entering a completely new paradigm remains to be seen. In the interim, there can surely be little wrong in trying to keep a balanced view of events.