Over the last year, we have seen stock markets gain despite expectations of lower global growth.
Most astonishingly, for example, we have seen Greece’s stock market outperform that of China, albeit from a historically low base (the Greek stock market has fallen 90 per cent since its peak before the sub-prime crisis began in 2006/7). This stock market phenomenon has primarily been due to action taken by central banks, with their explicit policies to support financial markets through monetary policy.
However, such action has not prevented periods of volatility as markets seek to test the determination of central banks, in particular to keep the eurozone from fracturing and to prevent the US from slipping back into recession as the so-called fiscal cliff approaches at the end of the year.
We saw an example of such volatility in October, when sentiment was dampened by figures from the International Monetary Fund, weak corporate earnings announcements and increasing political uncertainty – which financial markets never appreciate. In mid-October, the IMF forecast for global growth in 2013 was reduced from 3.6 per cent to 3.3 per cent. In a world which is connected by global trade, investors should not have been surprised that US corporates guided the market to downgrade expectations for their fourth quarter earnings.
The structural competitive advantages that North America enjoys, such as low natural gas prices and increasingly competitive wages (versus emerging market factory workers) do not provide immunity against lower consumption of their major export partners Europe and China.
However, over the medium term, some of our managers are gradually adding to their North American weightings. Stabilisation in US housing markets, rising employment and rising economic growth, albeit muted, are evident, and may strengthen the US dollar.
Moreover, now that Barack Obama has been re-elected as President, the country can move forward on critical decisions over its ‘fiscal cliff’, when the Bush tax cuts expire and the Deficit Reduction plan (agreed in 2011) due to come into force in January 2013, must finally be addressed.
Realistically, it is not until company managements have more clarity on these decisions that they will consider deploying the reserves of cash on their balance sheets.
In Europe, meanwhile, the debt crisis remains unresolved. Mario Draghi, President of the European Central Bank vowed in July to do “whatever it takes to preserve the euro” and in September effectively made the ECB the backstop of bonds of eurozone nations.
In mid-October, EU leaders agreed at a summit that the ECB would take responsibility for overseeing eurozone banks from next year, unifying banking supervision. However, the details remain undecided and although peripheral nations are being given extra time and funds to cope with their debts it remains to be seen how much scope there will be in lender countries such as Germany, which has elections next year, to keep bailing them out.
Turning to the east, Chinese headline economic growth appears to be slowing. Company and utility reports, such as infrastructure equipment providers and electricity usage confirm this.
Our underlying Asian managers, who have visited the region recently, report that wages are still rising at some 15 per cent or more per annum in China, while energy costs also continue to rise.
It remains a challenging environment in which to retain competitive corporate margins. High energy costs also persist in Japan, whose central bank has announced further fiscal stimulus recently by increasing its asset purchasing plan. The stimulus has been greeted by little excitement from Japan’s financial markets.
Market direction there and elsewhere is still dominated by politics rather than by the activity and progress of companies. As such markets remain vulnerable to being buffeted by the effects of future policy announcements, sovereign debt concerns and weaker corporate results.
Periods of volatility, however, can create tremendous opportunities for canny investors. It is at times like these that outstanding managers, who have gained a lot of experience throughout different market conditions and can act swiftly when necessary, come to the fore.
John Chatfeild-Roberts is chief investment officer at Jupiter Asset Management