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Brian Tora: Equity markets continue to defy logic

Brian Tora MM blog side

 Last week saw news output dominated by the passing of Baroness Thatcher. Even in death she created controversy and her presence again, on both the domestic and international political scene, reminded us of how decisive she had been in determining the direction of this country.

Under her guidance investors found their universe transformed. Equity investors multiplied and prospered, initially at least. Her like may not be seen again for some time.

Important as this might be, I suspect today most are totally Thatchered out, given the extent of media coverage.

Certainly, markets regained some of their poise, following the announcement of her death. Not that there is any correlation between the two.

Instead, it is time, I feel, to examine the more current influences that might determine how advisers determine the deployment of their clients’ assets.

As it happens, little has occurred to stimulate any conclusive direction to markets.

What has taken place has delivered mixed messages. Europe continues to provide plenty of uncertainty. Greek banks are in disarray and already the vultures are circling over the next likely recipient of bail-out funds.

Perhaps it would be more sensible to try to divine whether there is anything of significance to explain why equities continue to deliver a robust performance.

There are, of course, several possible reasons to account for why shares are in demand. For a start, returns on other assets are far from exciting. Even gold has stalled. And despite persistent above trend inflation, government bonds remain on yields that can only be justified in accepting on the basis that bank deposit interest is so paltry.

While some corporate bonds do offer enticing yields, investors appear to be eschewing them, presumably because of the inflation risk.

Then there is the risk that the Cypriot model might be exported to deal with other fiscal holes in Europe.

The news from Cyprus has been far from encouraging, with the government stating that it remains well short of the funds needed to mount a comprehensive bank rescue and to meet the demands of the short term lenders in Europe.

This suggests the pain felt by Cypriot depositors may yet intensify.

If bank deposit accounts become fair game for governments needing recourse to finance, then perhaps equity investment looks a safer bet.

It strikes me, though, that any migration of the themes adopted in Cyprus are more likely to take the form of a wealth tax of sorts. That would be rather less encouraging for markets, though in reality it might also prove rather difficult to implement in any meaningful fashion, with the middle classes bearing the brunt of any government grab.

But perhaps investors are taking the view that the worst is truly behind us and economic growth, helped by a little de-leveraging brought about by allowing inflation to persist, is just around the corner.

If so, they might like to take a look at the latest IMF forecasts, which have seen a ratcheting back of expectations, including in America. Assuming we can consign the financial upsets of recent years to history this soon demands an act of faith that is beyond me.

So with May just around the corner, and nothing to look forward to in the form of a sporting extravaganza – as we had last year, a policy of caution seems called for. Markets do not travel in straight lines, after all.

Still, there is more of an appetite for risk around, so perhaps any consolidation will be modest. Unfortunately, though, there seems little sign of politicians reversing their more interventionist stance.

If this persists, and you feel the odd earth tremor or two, then it is highly likely to be our recently departed prime minister spinning in her grave.

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


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