Last week saw the FTSE 100 Index toy with the 6400 level – the highest point for several years although still below the all-time high.
Has anything happened to stimulate this continued rush of optimism? Not really. True, we have survived the corporate reporting season with few surprises and Europe has lived to fight another day but the best that can be said for the market is that there has been an absence of shocks.
Two points occur to me, though. First, not all markets are behaving in the same fashion. Second, market behaviour usually anticipates events, rather than reflect them. Perhaps I should add a third – that returns to a global investor have been distorted recently by a more active foreign exchange market than we have seen for some time. Sterling has had a particularly tough time. Currency wars have been blamed, but this is a big topic, probably best left for another occasion.
Looking at the variation in performance between various markets, I am struck by how much China has disappointed in recent years. The Shanghai Composite shed nearly 22 per cent in 2011 following a fall of more than 14 per cent the previous year. It barely scraped into positive territory last year and has lagged both the UK and America so far into 2013. Yet this is a nation enjoying growth rates we in the developed west can only dream of.
Of course, some market performance reflects what has been happening on the ground, so to speak. European bourses may have been having a better time of it recently, but they are still lagging the UK, US and the wider Asian indices. As it happens, the recent poor performance of sterling against the Euro has exaggerated the recent recovery for sterling investors, but an argument does exist to suggest that there is more catch up to take place in the Eurozone.
As for the anticipatory nature of the stock market, recent stronger markets – which did run into some head winds last week – appear to be banking on a continuation of the American economic recovery bailing out global trade. Given that the deal on tax rises and spending cuts is far from concluded, that seems to be wishing for a lot. Except that the dollar is strong, the housing market is building on its recovery and consumer confidence is rising.
Then there are the effects of manufacturing returning to onshore America and the abundant supply of cheap energy through shale oil and gas deposits. In other words, the bulls do have a case, even if it is far from watertight. But that’s what makes the business of investing so interesting. In the end analysis, you can never be absolutely certain what final outcomes might turn out to be.
But I am struck by a modest shift to more positive news amongst the many items that cross my desk. For example, I read last week that Thailand is enjoying significant economic growth, with a surge in the last quarter of 2012 bringing the year’s total to a 6.4 per cent rise in GDP, ahead of Indonesia’s 6.1 per cent. The Asian growth story is far from finished.
Even here at home news appears to be improving. Residential housing transactions have been rising and job creation also appears to be on the up. All this stands in stark contrast to the picture painted by our currency, from which investors appear to be running lest our economic fortunes stay in the doldrums. Given the start to the year for domestic equities – the best in two decades – it would be foolish to bet against some short term profit taking and consolidation, but my confidence, along with that of the market, is growing in a happier outcome before too long.
Brian Tora is an associate with JM Finn & Co