‘Halloween is an opportunity to be really creative' - Judy Gold
If you have been watching the FTSE-100 index of leading UK shares over the past few weeks you would have seen it flicking above and below the 7,000 index point level. Professional investors often describe such moves as indicating a stock market that is 'unwilling to push through resistance levels’. In short, prepare for something bad.
With Halloween almost upon us it is the right time to review the potential for any upcoming stock market horrors. If we look at the evidence this week then uncertainty continues. UK economic growth was a little better than expected during the third quarter of 2016…but a closer inspection of the numbers showed that it was the service sector making all the running as the industrial/construction sectors contracted. Meanwhile there was good news for Sunderland as Nissan committed themselves to new investment and car production…but questions about what precisely the UK government offered as a commitment remain at the time of writing unclear. Finally the Governor of the Bank of England - Mark Carney - confirmed that he would be taking into account the fall of the Pound in his views on whether to cut interest rates or not in the future. Given the Pound’s plunge over recent months is quietly stoking inflation the chances of a further rate cut are receding by the day.
Put it all together and it is a clearly mixed backdrop.
Within the global markets the announcement of the mega US$100bn plus attempted purchase by American telecoms behemoth of the media content business Time Warner was met with a degree of scepticism by a number of observers including both US Presidential candidates who questioned the rationale for the deal. Certainly efficiency gains equivalent to just around 1% of the total price paid highlights that this deal is not the easiest to financially understand. And it does tend to be the top of the stock market cycle when such deals are struck as observers back in 2000 and 2007 will remember. Meanwhile in the UK market the mooted listing of software company Misys was abandoned as potential investors baulked at the valuation the business was being offered at. Of course this follows other recent listing issues including the sharp cut in the price by waste company Biffa earlier in the month to get its stock market debut secured. Unfortunately the shares have fallen even further in their first couple of weeks of stock market life.
So Halloween horror then in terms of the market outlook?
Hang on a second. I have talked about in previous columns the caution - and high cash balances - of professional investors and why that is potentially good news as the pressure for them to invest money before the end of the year is increasing. I have also noted the downturn in the performance of bonds around the world and this continues apace assisted by a rise off the bottom of inflationary forces. The attraction of higher yielding equities remains clear for those requiring income. And putting all this together note how the three UK banks that have reported this week - Lloyds, Barclays and Royal Bank of Scotland - actually were generally making fairly positive comments and especially in the case of the latter two exhibited a clear upward move in their share prices as the results were digested. Within even fluctuating stock market indices there are always individual shares doing well…and that’s why I cannot be too pessimistic for active investors today.
The reality is that to be pessimistic - or the more muted uncertain - is easy today. However as the world’s most successful investors of recent decades Warren Buffett has continually urged as all: 'be greedy when others are fearful’. There are opportunities inside equity markets and usually these opportunities count double when pessimism is high. Given that there is good and bad economic and political news in the big world out there, inevitably there will be good and bad in the global stock markets too. But with - on average - higher yields on offer and bonds and cash offering precious little at the moment my faith is still in stock markets making you a bit of money by Christmas a period seasonally they historically have performed very well in.
In short: the Halloween mask may be appropriate for the next few days but the warm embrace of Santa Claus awaits you over the next couple of months.
Chris Bailey has 20 years of investment industry experience at long-only and long-short institutions as a global multi-asset fund manager, strategist/macro thinker and, in the earlier part of his career, as a securities and fund analyst.
In 2013 he founded Financial Orbit focusing on daily macroeconomic comment and securities analysis.
The content on this page does not constitute financial advice and is provided for general information purposes only. Nothing on this page should be regarded as an offer to conduct investment business or to buy/sell any investment