Brian Tora says the recent uptrend is welcome, but those butterflies just won’t go away

This article was published in the April issue of IFA Magazine, shortly before the May 7th election

 Perhaps, like me, you developed a fair degree of cQEanvass fatigue in the run-up to this month’s general election. I did find the way in which our own stock market shrugged aside the uncertainties created by the clear absence of a predictable outcome remarkable. True, we did have the mega merger effect to start investors slavering at the possibilities consolidation in the oil and energy sector might throw up. Still, markets built on takeover speculation should never be considered reliable.

Not that we are unique in finding markets buoyant against the odds. Europe and the US have both seen prices moving up – in the case of European bourses, despite continuing uncertainty over whether Greece can meet its debt obligations. By the time you read this, we may already know whether Greece has cleared the latest hurdle in trying to secure refinancing. That desperation has set in in Athens is evident from the way it’s been cosying up to President Putin. (Now there’s a world leader who’s held in international high esteem and who doesn’t have any economic issues of his own.)


Europe Rides a Thermal

But Developed Europe indices managed a 10% plus rise during the first quarter of this year – a performance that was bettered only by Japan, which was up 15%. True, extend this performance out over a year and you find Europe not much more than 4% up, while Japan secured an advance of a mighty 24%.

And that was just a whisker behind the outright winner for the twelve months to end of March 2015 – the good old United States of America. Our own Footsie could barely gather a rise of 3% over the year as a whole, and not much more over the first quarter.

Nerves About America

While there was a degree of relief to be expected in European shares’ performance since the year began (the euro was less fortunate, being sold down comprehensively as a consequence of the ongoing Greek tragedy), the situation in America is less easy to fathom. True, most data emerging from the world’s number one economy is supportive of the fact that the corner has well and truly been turned and that the only way is up. Yet please excuse me if I feel a certain inexplicable nervousness over investors’ seemingly unstoppable optimism.


For a start, we know the tide is turning within the Fed over whether a cheap money policy can be continued for much longer. History plays its part here: memories still remain about how the early end to monetary easing in the 1930s led to a reversal of the economic recovery it had fostered. Now, the Fed does not wish to act precipitately – but then again, it is only too well aware that this great financial experiment that is Quantitative Easing cannot continue indefinitely.

While dearer money is inevitable, quite when it will come into play is less assured. This has given investors the encouragement they seek to remain bulls of corporate America – but I wonder just how much the strength of US markets is dependent on freely available cheap money? A loose monetary policy has a habit of putting cash into short term investors’ pockets, rather than where it should belong – long term capital investment.

Time to Sit on the Sidelines?

So I confess to feeling nervous over the likely medium-term direction of markets. China is slowing; emerging markets continue to display a degree of disarray; geo-political issues abound; and the unwinding of monetary easing – both here as well as in the US – could see a risk-off approach returning to markets. Quite how far any disenchantment with shorter term prospects might take markets is hard to fathom, but a discreet period of sitting on the sidelines might prove no more than prudent.


The problem remains, though, about what to do with your cash. Dearer money is hardly likely to favour bond markets, but a flight to safer havens could limit any fallout, particularly in the better rated issues and certainly if rate rises are limited, as seems most likely at present. What we do know is that the investment world remains as unpredictable as ever and that events move with an increasing speed. Still, it would be boring otherwise, wouldn’t it?


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