Market View
“No-one knows what the future holds. Even the government’s struggling. Everyone’s cautious” Himal Metha
Expert economist Graham Bentley from Skandia explains how movements in the worldwide economy might affect your investments
Generally, trying to predict stock market behaviour is a mug’s game. Economists, strategists and investors achieve varying degrees of success when forecasting against a ‘normal’ background of rising or falling inflation, booms and bankruptcies. Dealing with a sovereign debt crisis within a monetary union, with no fiscal authority or lender of last resort, will really test their credentials.
What about the year ahead?
That said, investment managers are telling us they expect 2012 to be a very tough year for global economies, with politicians and policy initiatives impacting on the ‘big picture’. At Skandia our own view is aligned with that, focusing on the key themes that will drive market performance in one direction or another. However, at the level of individual companies, which trade across multiple economies, their performance is often independent of the economics, but more on that later.
It looks pretty clear that the global economy will be very weak in the first half of this year at least. Consequently inflation would be expected to fall worldwide, and that should lead to more money being pumped into economies by the respective central banks. The Eurozone appears likely to stay in a deep recession until the end of 2012, with the worst being felt by the peripheral economies (Spain, Greece, Ireland etc); following ten years of spending like the Americans, those smaller economies need to use the next ten to save like the Germans! On the other hand, the European debt crisis needs to be ‘resolved’, if only in the sense that its performance shouldn’t impact other economies and markets.
And there’s more
The USA will be hurt in the first half of 2012 by fiscal tightening (otherwise known as austerity measures), but should become stronger later in the year. China, an increasingly important driver of global growth, should avoid a recession despite a downturn, picking up again in the second half of next year against a background of falling interest rates and inflation, possibly outperforming western developed markets. On bond (i.e. debt) markets, the difference between the rates of interest governments and companies pay to service their debts will narrow, with government yields rising (and prices falling) while corporate yields, and therefore prices, will do the opposite.
What successful economies are made of
Now while these are so-called ‘macro’, or large-scale trends, it is important to understand that successful economies are forged from three things: a decent banking system, a viable fiscal policy, but especially a strong corporate sector i.e. company profits. Despite the gloom in various countries at a high level, the fact remains that companies often do well in spite of governments and local economic woes. Apple is a case in point. A US business, it now vies with Exxon for the title ‘world’s biggest company’. It doesn’t seem to matter where you are in the world, iPhones, iPods and iPads surround you. And guess what? Not a single component is made in the USA. Nine countries contribute iPhone components, and the phone is assembled in China. Of the $500 cost of an iPhone, only $180 relates to its manufacture. It is truly a global company. Despite being a giant, Apple’s share price has risen over 24% last year, and 220% over three years.*
Adding income
No less importantly, many companies will provide valuable income to their investors through the distribution of dividends, even if their share prices remain static. Those dividends are typically in excess of local interest rates currently, and when they are reinvested, capital grows more quickly. Many of these same quality companies finance their growth by borrowing on bond markets, rather than from banks. Investors in those bonds are effectively lending to those companies, and are paid interest in return. While some governments may be ‘suspect’ in terms of their ability to repay their loans, there are companies which are paying higher interest to lenders and with arguably more chance of paying it back. This interest even gets a 25% boost from the taxman when held inside an ISA, and of course as with all ISA investments, the investments grow tax-free and any income taken is also free from income tax and capital gains tax.
Generally, deficit reduction is likely to remain a theme in almost all developed economies for the next few years. However, buying funds that invest in the equity or debt of strong, quality companies around the world that make products people want to buy, will continue to provide longer term benefits to investors.
* As at 16th January 2012