I should have realised I was tempting fate with my optimistic comments last week. Driven more by a lack of encouraging news and investor inertia, markets drifted back, leaving behind earlier highs.
Even when the news improved, there seemed a remarkable lack of enthusiasm amongst the movers and shakers of the investment world. True, better economic news from America and an upbeat autumn statement from the Chancellor stirred some interest but longer term doubts clearly remain.
Let’s reiterate some of the good news. US economic growth has been revised up – to a respectable 3.6 per cent annualised in the third quarter of this year. While still retaining a healthy degree of scepticism on statistics such as these – constantly revised over a growing period of time – you really should not sniff at that sort of a turnaround. After all, Brazil’s economy has started to shrink, despite the upcoming Olympic boost.
Then we have the Autumn Statement delivering the administration’s take on life this side of the pond. It was possible to detect a degree of smugness in Osborne’s delivery as he felt able to announce upward revisions of growth expectations for both this year and next. While we are hardly in runaway territory, next year we look capable of achieving close to trend growth numbers. Moreover, the Office of Budget Responsibility actually believes the public finances could move into surplus during the life of the next parliament.
As it happened, the measures announced trod a delicate path between easing the burden felt by an electorate hard pressed by continuing austerity and ensuring that spending remained under control and tax revenue was enhanced. The easy announcements – CGT on foreign property owners and more anti-tax avoidance measures – may not contribute significantly to the Treasury but are necessary if later retirement and other less palatable changes are to gain acceptance.
Overall, though, the message on both sides of the Atlantic is improving, yet markets remain subdued. There is, perhaps, a lack of confidence in governments following the financial crisis. In other words, many investors fear that action taken so far has more to do with gaining electoral credibility than with actually addressing the problems exposed by the credit crunch. And increased interference from our political masters has done little to add to comfort levels.
In a recent company statement, one of America’s business leaders said he believed that government policy was leading to either a deepening recession or a prolonged period of above trend inflation. His problem was that he did not know which was most likely. Of course, he was merely expressing his personal opinion but the fact that such a view might be shared more widely could explain current investor caution.
British and American economic resurgence is far from assured but behind the scenes conditions do seem to be improving. Both the Bank of England and the European Central Bank kept rates on hold last week, while a member of the Fed’s Open Markets Committee pointed out that tapering was not tightening, reassuring markets in the process. It looks as though cheap money will remain until the developed world can demonstrate a full head of steam.
Then there is the oil situation. While nothing that is influenced by events in the Middle East should ever be accorded absolute certainty, last week’s OPEC meeting must surely have reflected on how best to manage downward pressure on the price brought about by increased supply.
Not only is the US likely to become the world’s largest producer within two years, thanks to shale deposits, consumption there has been falling. And don’t forget Iran. Cheaper oil will help economic progress through cheaper transportation costs. Watching the oil price is crucial.
Brian Tora is an associate with investment managers JM Finn & Co