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Brian Tora: Markets face many varied obstacles

Brian Tora MM blog side

Lunch with Psigma’s Bill Mott is always a pleasure, even when he puts forward a point of view that conflicts with my own reading of the current situation.

His summary of probabilities puts continuing above average inflation further down the likely outcomes than I have been doing, with a persistent period of below average growth favourite to act as the background to markets. And he considers residential property too expensive.

Of course, we will only learn after the event which scenario turns out to be correct – and plenty could happen over the coming weeks and months to upset the apple cart or accelerate a trend. I would certainly not disagree with the Psigma income team’s contention that three influences will determine how markets behave. And each of the three has very open potential results.

First, the risk of policy error from governments and central bankers is acute.

We have a raft of quantitative easing being embraced by those who fear global economic stagnation, while those who believe earlier mistakes need to be paid for are also powerful voices.

Is austerity the way out of our debt problems, or will it simply compound the errors already made? And can competitive currency debasement ever achieve anything? Only time will tell.

Then there is the growing power of the regulators. We have become well used to this in our industry, but in every walk of life we have increased government interference through the regulatory systems that have been constructed and expanded.

Don’t get me wrong, regulation is a necessary part of our increasingly open and transparent world but it contains the threat of undermining individual companies and even whole industries (banking for example), which makes the job of the fund manager that much more difficult.

Finally we have the ever present geo-political uncertainties that can so upset investor sentiment. Might Israel attack Iran? What are the eventual consequences of the Arab Spring resulting in a shift to more fundamental Islamic regimes?

We might make judgments on the probable consequences of inflation and regulation on markets, but this last one is a true loose cannon.

That said, markets have regained significant composure, with a little more confidence edging in as signs of more concerted action in Europe and better economic conditions in North America continue to build.

But it is worth remembering that while we may live in a global village, not every participant is moving at the same speed. A colleague sent me a chart recently, displaying where all the major world stock markets were in relation to their all time highs and when those highs were achieved.

Unsurprisingly, Greece was in the worst shape, languishing at around 90 per cent below a peak gained in 1999 – the same year our own FTSE 100 Index reached its summit (we’re a little over 15 per cent short of our high). Japan, more than 70 per cent off its high lies second from bottom, but the market there peaked in 1989. China, Italy and Ireland are all around 60 per cent below their all time records, with China’s achieved just five years ago, Ireland’s the previous year, but Italy’s in 1999.

As for those that have shrugged aside this decade of market malaise, both South Africa and Mexico stand close to all time highs reached this year, while the US and Germany peaked in 2007, but are only around 10 per cent below that level. It all goes to show that picking where you invest is as important as ever. Even within a seemingly homogenous geographic sector, wide swings in performance are possible – Germany down 10 per cent, Greece -90 per cent, for example.

To return to the Psigma lunch, with one approach I really cannot find fault in these difficult times.

Whether the final outcome is prolonged below trend growth (60 per cent probability according to Bill), the return of inflation (25 per cent) or economic stagnation and deflation – Japanese style (15 per cent), shares offering high dividend yields with sustainable businesses should be sought out. It doesn’t seem like rocket science to me.

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

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