Equity Markets Oversold – Time to Buy or Blue-Sky Thinking?
17th January 2016
Equity Markets Oversold – Time to Buy or Blue-Sky Thinking?
Private Equity and Alternative Investments Specialist/Investor Relations and Equity Fund Distribution. Partner at Lancea LLP
Time to Buy
Okay, so with all this blood on the streets it must be time to buy? I shouldn’t have put a question mark there, in fact I should simply have kicked this off with ‘it’s time to buy’.
Personally, over a forty year career, the doomsayers who pop out of the woodwork during times of market uncertainty certainly make a lot more noise than when markets are moving ahead; but let them get on with it; the markets will be cheaper for the rest of us.
In a way, though, the doomsters are doing young people a great favour. Their predictions of crashes will surely not be in the equity market alone. Property, commodities and lower quality corporate bond assets look equally vulnerable, which is a good thing for young people who have been locked out investing in the fear that they’ll be the last ones in before the knife finally drops.
But they’d better be quick, after all, what is happening is not a crisis, it’s a correction and we’ll soon be on the way up again.
The Oil Price is About The Dollar
First things first, the dollar and oil. How anybody can correlate the highs and lows of the the current millennium’s oil prices to economic activity is beyond me. Oil got expensive on the back of QE, which flooded the markets with dollars. The dollar remains, and is increasingly the spondulix franca and when the Fed printed them until the presses glowed red the worst thing was to be a dollar holder. Best option? Buy commodities. Most liquid commodity? Oil. The oil price has certainly has been a bubble of consequences but we shouldn’t be tripping over ourselves to call it an economic indicator. Sure enough, there is plenty of oil floating round the seven seas in VLCCs and ULCCs as well as billions of gallons in enormous subterranean reservoirs. The other side of the coin on this is that you don’t wait until the reservoirs are being drawn down or when the occasional ULCC actually starts delivering at Rotterdam or Singapore. By then it’s too late. Live through a bit of volatility now and oil should provide a handsome return – no pain, no gain.
When China Devalues it’s Off to the Beijing Races
Secondly, China and the emerging markets. China will devalue and in effect roll on QE as the Fed tightens and claws back dollars. Admittedly, it would be better that a nation of such a population size would have the discipline to balance their economy towards consumption but necessity prevents the rapid pace hoped for by the government. This would bring about a de-pegging against the dollar in other, emerging markets. It may sound like unfair competition but the Finns and Swedes did it for many years to reduce their cost to export.
Are Earnings Under Significant Pressure?
Thirdly, are earnings under such significant pressure across the board? Possibly where there is disruption such as retailing and where the dollar impact has hit the attractiveness of digging stuff out of the ground the rest of the investment universe is hardly on its last legs. Houses still need to be built, transport demands with home shopping are increasing, the grey-pound/euro/dollar is going to spent on travel and the need to define oneself according to brands is on-going. The internet lacks capacity, mobile networks are tripping and a world surrounded by sensors – driver-less cars or refilling fridges on time – is upon us, now, today and even more tomorrow.
Or Blue-Sky Thinking?
If there is one caveat to this optimistic stance then I would say that trust is the biggest concern. Outgoing US President Barack Obama may well be lauded for what he has, apparently, achieved but what he and other leaders have delivered, said in his parting comments, is the increasing ‘rancour’. Whether it’s the panjandrums who run athletics and football, the bankers, who are not bankers or the politicians that have succumbed to the mob or the dollar it is clear that the political situation is the biggest risk to us all, not just markets. Indecisiveness about funding refugee camps in the Lebanon and Jordan have seen unprecedented numbers of movers and migrants. It seems that our politicians, in their inability to nip problems ‘in the bud’, are the real cause for concern and nine times out of ten it’s politics that creates or demotes confidence.
So what are the political risks?
Brexit for one but its process could reduce the European style of rule by consensus rather than decision. Brexit cuts both ways in that its potential demonstrates how Europe has gone wrong but, through proper discussion, could remove Europe from the brink of becoming a super-state in name only.
The public sector in Europe; The public sector has become a leviathan of mismanagement and political appointments. In the UK, the NHS, which gobbles up over £100 billion a year, has become like an albatross round the neck of politicians, damned if you do and damned if you don’t. The size of the public sector is incongruous with the demographics of Europe: full stop.
An on-going political stalemate in the United States; President Obama has achieved many things but the United States has become a nation divided under his administration. He is the nice guy in a place that needs the tough guy. Sadly, the tough guys are also the crazy guys. Watch this space.
And the Conclusion?
Politics makes me uncomfortable, especially today’s brand but when have our leaders actually led us – and when they did, what was the result (Afghanistan, Iraq, Syria)? And so too was the case after WWII. Korea, Vietnam, Cambodia, scuffles in the South Atlantic, terrorists in the UK, Spain, Germany, Italy among others.
Yet the private sector is having had a torrid time, held hostage by political mismanagement and an unfriendly electorate cursing the widening wealth gap, has built a wealth of experience of living in difficult times. Management are better than the markets believe and although there may be some horrendous teams out still lurking around there are many more who can manage the hurdles put in front of them. Ergo, time to buy!
Please note that the opinions contained in this piece are personal and do not necessarily reflect the views of Lancea LLP.
