There is certainly more volatility in markets these days. Japan has been a particularly tricky place for investors recently, with swings of as much as 10 per cent in a single day of trading.
While the Japanese market is still leading the field amongst those of the developed world so far this year, performance like this demonstrates how nervous investors still are – perhaps understandable, given the history of this market, which still stands well below the peak reached in the late 1980s.
Behind the unsettled state of markets lie concerns over whether the Fed is to continue its easing programme. That, and worries over China’s economic strength – both of which I remarked on last week –have continued to receive attention. The interesting aspect of all this is that Japan continues to wobble, even though the news has become a little brighter. And there have been other developments which suggest the picture might be improving.
Ten-year bonds in the US have been having a torrid time. May was the worst month for two-and-a-half years, with yields nudging two and a quarter per cent. While this is hardly a massive move (this market has fallen 3 per cent – not a great deal if you compare it with Japanese equities, but pretty scary in bond terms), it appears another straw in the wind that suggests the American economy is gaining strength, so easing might be eased.
Should we be concerned over this? The worry, of course, is that some of this money has found its way into financial assets and may be withdrawn if the Fed tightens. The other side of the coin is that tightening will mean the authorities are more confident that the economy is now back on track, so better times will lie ahead. Given that we saw some encouraging house price rises from America last week, there is every reason to believe the US consumer may soon feel better able to spend.
But last week we also saw the second-biggest fall in the FTSE 100 Index so far this year. True, it came the day after a particularly strong performance for domestic equities but such an event underscores the fragile nature of what has been a remarkable recovery for equities. As I also said last week, the higher the market goes, the more caution is needed, but the chorus of optimists is getting louder even as the markets fluctuate.
Revered fund manager Crispin Odey, considered to be a contrarian, recently expressed his confidence that the global economic recovery is on track. He is particularly confident of prospects in the US and his portfolio reflects his beliefs. His track record is such that ignoring his views might be considered foolish. Moreover, economist Roger Bootle, in a newspaper article, joined the ranks of those who believed this recovery was on solid ground.
Another indication of what may lie ahead comes from Europe, which is starting to backtrack on the austerity packages. A colleague of mine made reference to his expectation that this would occur in a recent newsletter but probably not until the autumn, by which time the German elections will be out of the way. I don’t know if he is pleased his prediction is proving correct or annoyed that it is all taking place faster than expected.
So it is beginning to look as though growth, rather than debt reduction, is becoming the prime concern of western governments. This could account for this year’s progress, though not for the recent wobbles. Perhaps it is all just profit taking after the rise, in which case Japan’s extreme reactions look more understandable. What could well happen is that once evidence of the economic recovery comes through, markets stall. But then investment is all about anticipation.
Brian Tora is associate with Investment Managers JM Finn & Co