It’s Spring time and love is in the air, along with the usual year-long uncertainties of market life

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By Robert Sutherland Smith

Markets are too intertwiningly complex for simple rationalisation; so one does not rush get involved with the intellectual challenge of trying to understand and explain them every day. No man is an island unto himself and nor is any market.

In the age of globalization and digital technology, economic, financial, political and psychological facts and factors move through markets like quick silver. And there are many of them; heading from and towards all directions along the thoroughfares of investment and trading life. There is too much information and data coming from too many directions to be able to construct a useful, predictive model.

However, thanks to our hunter gatherer ancestors, we have a capacity for instinct and feeling. One may not know a thing but an instinct may lead us towards it. There is also the assistance of human custom and practice, precedent and folklore; a timeless human method for trying to impose coherence on chaos. It was the latter, prompted by some seasonal instinct that caused me to think about the UK equity market. We are in the last days of March, and May will soon be less than four weeks away.

As we know from market folklore one should sell in May and go away. In other words we are approaching spring and the summer season when volumes thin and markets often weaken or fall – although not always. In markets, it is the exceptions that prove the rules. If markets are less predictable than physical nature, it is in part because they are the stuff of human activity and human psychology. As for that, Will Shakespeare put it neatly when he said that we are the stuff that dreams are made of – a bit less tangible than the stuff that geology is made of.

Last May was not one of those to sell and go away years, simply because we were in the throes of US economic recovery and no sensible shareholder wanted to be absent from that. The question concerning the US this year is whether or not the US economy will continue to grow when interest rates are set to rise. In the market’s summer doldrums fears tend to get exaggerated in my experience. Summer markets seem made for bear stories and beliefs. US inflation needs to get to 2%; that is the Fed’s mandate. Inflation is still below that and, it appears common sense to me, inflation is unlikely to take off like a rocket. If that is so, then the Fed rate will not need to increase by a lot. That makes me think that GDP growth and lending rates are likely to be compatible for some time. So I have a bullish instinct about the US in 2015.

After an excruciatingly long pregnancy, European goose has laid an egg with the words ‘quantitative easing’ stamped on it. It has started auspiciously. The Euro is up not down. That seems to imply that foreign exchange markets think that it will induce economic activity and eventually some much needed inflation. In any event, there are some green shoots of seemingly economic recovery in parts of ‘Euroland’ including Greece; the latest German business confidence survey was described as “robust”. For its next trick, Europe needs to get on with a Eurozone fiscal and banking system to transfer surpluses to deficit areas of the zone. Then it will start to look like an economic union to match the existing and economically premature currency union. That has been another long pregnancy and there has to be a hopeful chance that this second egg will appear sooner rather than later.   

China is more of a conundrum. It is more opaque than Western economies and no one trusts the official economic data. There has clearly been a lot of domestic lending and observers question how long that can go on without producing not an egg but an explosive device, blowing up the Mandarin duck. On the other hand, China has economic levers which western countries lack; they include no effective separation of constitutional powers of executive government, legislation and justice; a perpetual one party government with eloquent powers of direction including the police and frequent executions and imprisonment for malefactors, discontents  and critics. It is clearly trying to shift the economy from an overwhelming dependence on infrastructure, construction, manufacturing and exports to greater domestic consumption. Although the market gets hysterical when any monthly GDP number is slightly below 7.5% and can’t get over the increasingly historic fact that China’s economy has long ceased to grow at 10% p.a. – which means that it was doubling about every seven years. With domestic Wages and earnings rising, some expect exports and growth to be helped by a weakening yen exchange rate.    

My instinct is to still feel on balance bullish about the US, Europe and China. However, we also have a seemingly religious civil war between Sunni and Shia Islam in Yemen, with Saudis on one side and the Iranians on the other, which has pushed up the price of crude oil despite the recent oversupply of the stuff. More peripherally, ‘Bibi’ Netanyahu has stoked the frustration of the Palestinians by declaring that they will never have what they are told by the Obama Administration they can achieve through peaceful negotiation – the long awaited two state solution. I have no means of evaluating the risk of such Middle Eastern Gordian knots except to say that it may be potentially more explosive than a mandarin duck egg.

As for the UK economy and currency, we all know that we face the certainty of an uncertain political resolution at the forthcoming UK General Election with a minority government and a constitutional predicament with the SNP potentially holding the balance. It looks like a ‘win-win’ situation for Alex Salmond. No doubt foreign investors will get a bit edgy at the uncertainty of it all. However, we have had minority governments before. Similarly, a successful UKIP electoral performance would not be good for business or economic prospects either. The Election probably means that May could come a month earlier this year. As the poet said, “Oh to be in England now that April’s there”.

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