It was pretty up and a down last week – fortunately, as I write, more up than down. This could all change, though. Not much in my pile of reading material or in my interaction with the investment community has given me much encouragement but then, as the saying goes, it is always darkest before the dawn.
Let us start with the written word. Among the flow of bearish information crossing my desk has been a whole raft of articles effectively writing the obituary of the euro and, in some cases, of the whole European Union. I detect a degree of wishful thinking present in the minds of some commentators but it serves to underscore the parlous situation that Europe finds itself in.
Economic data does seem to confirm there is little chance of economic growth bailing out those parts of the eurozone that used cheap money and a strong currency to over-reward themselves. Holding the whole shooting match together will take luck and political will. Witness last week’s court action in Germany – resolved in Angela Merkel’s favour but still a warning shot across the bows of more bailouts.
But the most disturbing piece of information that crossed my desk came from a colleague well versed in technical analysis. He lit upon a chart overlaying the S&P 500 index with that of the Nikkei 225 – but with an 11-year time lag. The parallels between what happened in Japan, starting at the end of the 1980s, with that of the US a little over a decade later were too striking to make me feel comfortable.
Not just in the shape of the charts, either. While the US hardly experienced the valuation expansion that took Japanese shares to sky-high ratings by the end of the penultimate decade of the last millennium, they did experience a property boom and in the collapse that followed, a banking crisis. And their response was to lower interest rates to near zero. Sounds familiar? Unfortunately it does – too much so.
If US markets were to track Japan 11 years in arrears, then the next move is down – perhaps testing recent lows.
My colleague was honest enough to say that correlations of this nature can – and usually do – break apart. The question was when and why. The why could well be the onset of sustained inflation – something the Japanese did not have to contend with.
There was scant comfort from the reborn investment trust seminars held in the City by ex-colleagues of mine with a deep understanding of this particular segment of our market. Both Sandy Nairn of Edinburgh Partners and Nick Train, who runs – among others – the very successful Finsbury growth & income trust, appeared slightly bemused by the summer collapse of equity markets.
Neither was pessimistic, which is not to say they viewed the future with unalloyed optimism. Nick’s view was that we would muddle through (we always had) and that it would be all over by Christmas. Sandy took a rather more pragmatic view but pointed to the market mispricing certain companies, providing opportunity for the diligent manager.
It is clear we could be in for a tricky and uncomfortable autumn and I will remain diligent as the various scenarios play out. In the mean-time, as it says on the posters, keep calm and carry on.
Brian Tora is an associate with investment managers JM Finn & Co