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Brian Tora: Don’t bank on a Christmas feelgood factor

Brian Tora MM blog side

The past few weeks have been occupied in producing a revised version of a newsletter for our clients. Inevitably, as with any innovation that involves new practices and a variety of contributors, slippage in the production timetable occurred. Although not great, it seemed sensible to revise the prices of the securities mentioned. It was remarkable how far some had advanced in a comparatively short space of time.

The fact that markets in general had been buoyant recently was comforting, although it was hard to determine quite why this resurgence of optimism had come about.

True, a solution to the Greek problem inched a little closer, while our own economic performance in the third quarter did not suffer the expected downgrade. But the fiscal cliff is still rushing towards us, while growth in the developing world is slowing.

It is what is happening in the emerging nations that particularly interests me at present. Popular wisdom has it that the future lies there. Aspirational populations that dwarf the developed countries will provide the future consumption so necessary to maintain global economic growth. But all the signs are that this growth, if not stalling, is certainly slowing.

A report came across my desk recently from an economics consultancy suggesting that, far from being a negative development that will upset the global balance, such a slowing in the growth of these previously buoyant economies is inevitable and should have little long term impact.

The report pointed to previous examples of countries that had enjoyed significant growth, only to see a slowdown indicating that sustained periods of double digit expansion are simply not possible.

Amongst those countries used as examples were Australia, New Zealand, Venezuela and, of course, Japan. Quite whether their assumptions should be taken as positive for stock markets is less clear, but the message that there really is little new under the sun was well made. Indeed, if anything it strengthened the argument that in these uncertain times, maintaining a well spread portfolio, diversified both geographically and by asset class, makes sound sense.

Meanwhile, the recent uptrend in markets, notably that of the US, has taken away some of the value that was present.

Shares are not exactly dear, but they look a little less compelling than earlier in the year. It makes me wonder if this December will buck the trend and produce a negative outcome for investors. The case for believing shares will rise over the festive season rests more on professional managers balancing the books for the calendar year end than any feel good factor generated by Christmas.

There is, though, a reason to believe that recent bullish trends might be sustainable. While macro-economic events and geo-political issues can still upset the apple cart, history tells us that markets tend to rise when there is plenty of money around. The weight of money argument is a powerful one and much of the cash generated by quantitative easing will have found its way into financial markets and, indeed, other more esoteric assets.

There is, of course, a risk that withdrawing this support will see a reversal of recent trends, but nervousness over the strength of the global economy suggests this may not happen soon. And inflation remains in the wings as both a solution to the western debt problem and a driver for some financial assets. It seems that the best lesson history can teach us is that nothing is certain and that investors – and their advisers – need to plan accordingly.

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


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