Dale Robertson from Edinburgh Partners summed up the state of the market at a seminar last week. Referring to his approach of looking at shares on a five-year earnings’ projection, he said markets are driven by emotion in the short term and, as a result, are unreliable. Speaking as someone whose life has been driven in no small measure by markets, I empathise with this view.
It is difficult to maintain a consistent detachment from the market when events cause it to move so dramatically. Human nature leads us to feel more optimistic when prices are rising and to take a more pessimistic view of things when shares are moving lower.
As the movements will most likely be stimulated by the newsflow, this state of mind will be reinforced – or even triggered – by what we are learning from companies and economies.
Perhaps we should be comforted by the fact that news remains very mixed at present, despite which shares have undertaken a significant recovery.
The week before last, the FTSE 100 index rose by 6 per cent and at least started last week on a positive note, even if the market ran out of steam as I gathered my thoughts for this column.
Perhaps returning to my topic of a fortnight ago now makes sense.
Two weeks ago, we saw the tail end of a sell-off that had seen the UK market shed close to 1,000 points. The recovery was helped by some of the early corporate earnings figures coming out of the US, which tended to surprise on the upside.
From now on, we will be showered with numbers from both sides of the Atlantic as the half-year reporting season gets under way in earnest. Signs are that the corporate world is in better shape than Western sovereign states.
The other side of a flight from equities was a surge in demand for gold. Not surprisingly, higher share prices have seen the gold price cool off, although it has hardly given up much ground. However, the dollar has also moved into reverse and the pullback in the gold price for investors operating out of strong currency areas – which includes sterling at present – has been a little more marked.
But the weakness of the dollar smacks of a technical correction and the true demand for gold may soon reassert itself – or not, depending on confidence.
The good news is that we are entering that period of generally low activity as investors large and small take time to recharge their batteries and reflect on how things might pan out in the autumn.
Economic news continues to exert a two-way pull and there are no clear signs we are fully back into recovery mode, yet there is a gradually building optimism that a double dip can be avoided. The consensus view remains for some form of anaemic recovery to be maintained while the inexorable transfer of economic power from West to East continues. Meanwhile, markets are pricing in some disappointment for investors.
Among the other presentations at last week’s G&N seminar was one on JP Morgan’s Chinese investment trust. A graph was displayed demonstrating the rapid rise of the Chinese middle class. The figures appeared less dramatic when it became clear these were people earning $2,500 and $10,000. Even so, the time for extreme pessimism must be past. The risk of being out of the market looks greater than being in.
Brian Tora (email@example.com) is principal of the Tora Partnership