An Autumnal Chill?

by | Oct 27, 2014

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Is it over yet? Brian Tora says there’s still enough reason for investors to be feeling twitchy at the moment. Fingers crossed.  (NB, this article was published in mid-October 2014)


 

As the nights started to lengthen and autumn began to exert its cooling influence on our weather, so the markets cooled too – weighed down by the gathering risks generated by geo-political conflicts.

In some regards, it is remarkable this didn’t happen sooner. When the Footsie was flirting a few weeks ago with its previous all-time high (back in 1999, no less), Islamic State was already garnering headlines and tanks were rolling in Ukraine.

Uncertainty on All Sides

Both these trouble spots have the ability to blow off-course the economic recovery that has been building over recent years. And as if to make matters worse, they have now been joined by a new pressure point – Hong Kong. Little wonder that the European Central Bank has embarked on its own form of quantitative easing, announcing an asset purchase programme that is likely to extend into the next few years and expand massively the central bank’s balance sheet.

At the beginning of October, our own headline index – the FTSE 100 Share – hit the lowest point so far for 2014. Those highs of high summer seemed a long time ago. But are investors right to be so spooked by the possible outcomes in those areas of tension and outright conflict? The answer is – probably.

Bears Prowling

Take Ukraine. With the ceasefire barely holding, the European Union is maintaining its tough stance on sanctions. While Russia must be hurting, it won’t be doing the fragile economic recovery in the Eurozone much good. Indeed, recent statistics suggest that growth in the core countries of Germany and France has stalled once again. And, while some of the peripheral nations appear to be improving, that in itself won’t be sufficient to head off a downturn.

As for Russia itself, the economy was hardly in a robust state even before the costly incursions on the ground and a tightening band of sanctions made matters worse. Russia isn’t like Western nations. Communism may have been thrust aside, but there is no real democratic culture alive in the motherland. Indeed, President Putin’s stance appears to have popular support, so heaven knows where the end game will lead.

Meanwhile, Ukraine’s economy is reported to have shrunk by 8%, showing that not all the casualties of this unfortunate conflict are from military action. It is unlikely that Russia really wishes to annexe even eastern Ukraine, given the costs this would impose on the state, but Moscow clearly will not tolerate a nation with close links to the EU and a possible member of NATO on its border. There is no easy solution to this crisis.

The Middle East

Nor is there a clear exit strategy for Western involvement in the seemingly intractable war taking place in the Middle East. Sunni and Shia Muslims have been at each other’s throats for centuries; indeed, the divide in this religion is even deeper than that between Christians who look to Rome for leadership and those with Protestant leanings.

Trying to reintroduce stability is leading to some very strange bedfellows in the anti-IS camp. We all have to hope the conflict does not widen further.

The Meaning For Equities?

Does this mean that investors should eschew risk assets, like equities, for the time being? With so much uncertainty about, it is hard to see major markets making much headway – while emerging markets are also beset with their own pile of problems.

But it is at times like this that opportunities are thrown up. With US tax laws threatening to choke off the recent wave of merger and acquisition activity and our supermarket industry in seeming disarray, we certainly live in interesting times right now.

As it happens, a colleague of mine suggested that, based on technical analysis, the Footsie was due a pull-back from the then 6700-6800 level that it had achieved earlier this year. As a new all-time high looked possible (though it was never reached), it seemed he had got it wrong. Recent market behaviour is making his assertion look more credible.

Remember, though, that the further we fall, the better the chance of a recovery. Despite current uncertainties, in the long term equities should be the place to be.

 

Brian Tora is an associate with investment managers, JM Finn & Co

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