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Cost-cutting pays off

Last week was tricky for equity markets. Behind the uncertainty lay fears that the economic recovery was stalling on both sides of the Atlantic. Nowhere was this concern more evident than in the performance of government bonds. The yield on 10-year gilts fell to the lowest level ever seen while the 30-year gilt yield fell below 4 per cent for only the third time. The flight to quality was clear.

Interestingly, this growing gloom was not reflected in the results from the world’s biggest marketing services group, WPP. Chief executive Sir Martin Sorrell was remarkably upbeat in his assessment of what was happening around the globe. True, he was not expecting an early return to above trend growth for the developed economies but it was clear that his view was that the improvement seen at the start of the year was holding.

Of course, he was referring to the corporate world. Governments are less likely to be increasing their marketing expenditure. In the US, this is of less importance than it is likely to be here and it is over there that the greatest surprise from WPP’s results emerges. It seems that strong growth in advertising spending in the second quarter was driven by the US, with traditional media “biting back”.

Marketing budgets can be an interesting leading indicator for the health of the corporate economy. They are among the first areas of expenditure to be trimmed when the outlook deteriorates. As a former marketing director, I can attest to the truth of this. So when the budgets are restored, it is usually because confidence is beginning to return. This appears to be the message from WPP.

But not, it seems, from investors. Aside from the flight to gilts, WPP’s shares took a hit on the publication of its results. Perhaps this should be treated with caution as markets are thin at present, with many managers away on holiday and trading volumes subdued. This did not stop a lot of companies posting figures last week, though, as they tried to squeeze in publication ahead of the holiday weekend.

It is the way in which companies are succeeding in bringing in results above expectations that provides much of the support for equity markets at present.

Last year was one of costcutting. This year, it seems they are reaping the benefits. The two-way pull that is being exerted at present is because many investors do not believe that the good news on the corporate front can continue if economic activity fades.

So as the days shorten and autumn beckons, we must resign ourselves to an increasing focus on economic statistics, with all the volatility this is likely to engender. The habit of taking the economic pulse of a nation too frequently does not help. Even if the news is better than expected, I still fear doubters will continue to cast a pall over proceedings unless and until signs of a true recovery build.

Looking further out, prospects do not look half bad. The public sector in this country was long overdue a serious shake-out. The Olympics should provide a useful boost. And many emerging markets are building their own domestic momentum. In the meantime, we may have to suffer the slings and arrows of outrageous fortune in market terms. But if corporate confidence holds – and current M&A activity suggest it might – a silver lining could indeed emerge.

Brian Tora is a consultant to investment managers JM Finn & Co

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