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Brian Tora: Are markets on the road to business as usual?

Faith in an economic recovery is growing and markets could return to normal post-QE.


For much of the time since I last put pen to paper regarding the state of markets, shares here in the UK have been making steady progress. As I write, the FTSE 100 is hovering around 6700 – the highest level achieved since last May. Then the market was knocked off course by fears that the US Federal Reserve Bank was likely to taper its bond purchases sooner rather than later. Subsequent evidence suggests such a move may still be a little way off.

But the signals remain mixed, even if a sense that the worst is now behind us is growing among investors. More positive news recently has been confirmation that Spain is emerging from its two-year recession, with progress being driven by exports. This more encouraging result saw 10-year bond yields there fall to 4.2 per cent, way below the levels of this time last year when they nearly reached 6 per cent. Bear in mind, though, that the equivalent German yields are below 2 per cent.

Progress is also being made on the banking union front in Europe, with a single regulator looking closer. Indeed, such is the degree of calmness that can be found on the continent that the euro has resumed its upward path.

Rather perversely, the US dollar has failed to make headway since the agreement on the debt ceiling was reached. With signs that a modest economic recovery is being maintained this could change.

Meanwhile that other convert to the doctrine of money printing, Japan, is having a tough time. Economically it still looks to be the sick man of the developed world, despite having China on its doorstep. News from China, on the other hand, has been encouraging at the macro level which has helped intensify the debate over the attractions of emerging markets. It would be a boring old world indeed if we all agreed on everything.

Drill down into some of the detail in markets though and it is clear that experience is widely varied. Last week saw Caterpillar downgrade its expectations for future growth and prospects thanks to a fall off in orders for mining equipment. The shares suffered accordingly and this confirmation that the mining sector remained under pressure reminded me of the importance today of such companies in our benchmark Footsie index. No wonder we are still below the peak of 1999.

This remains a stockpicker’s market, with relative valuations changing constantly as fund managers seek to determine where future growth might lie. From a concentration on yield at the beginning of the year, analysts now look to be backing growth companies, driving up multiples. This suggests that faith in our economic recovery is growing among the investment community and it could help stimulate momentum.

How far this trend might continue is difficult to gauge. But I read some interesting research recently that argued the equity risk premium had fallen and cyclical stocks stood a good chance of being re-rated, perhaps significantly.

If this does turn out to be the case, then it would appear we are returning to the type of conditions that have prevailed in the past, putting the disruption caused by the financial crisis firmly behind us. Such a contention does not mean that markets are bound to rise, but it should make the investment manager’s task that little bit more predictable. With so much happening in the fund management world at present, assessing who to back has seldom been so crucial.

The future is never that clear, even to the most talented of managers, but the ending of that great financial experiment which is quantitative easing should allow us to return to conditions that experienced fund managers are better able to understand.

Brian Tora is an associate with investment managers JM Finn & Co



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