Recessions are “a state of mind”, says The Economist, and “the world’s mood is troubled”. If the public is confident and happy to spend then “even a big shock” may not halt an expansion. Conversely, if times are fearful, then “even a modest nudge may push an economy into a slump”.
Markets have been on a downswing ever since Donald Trump upped the trade war ante on 1 August. The end of last week brought yet more escalation: Beijing announced tariffs on $75bn (£61bn)-worth of US goods. Twelve hours later Trump hit back, hiking tariffs on $250bn of Chinese imports to 30%. As John Authers notes on Bloomberg, the president appears determined to pursue an increasingly nasty trade dispute to the bitter end, even at the cost of a falling stockmarket.
The impotence of central bankers
The trade impasse is sowing pessimism. The Swiss bank UBS this week recommended that investors reduce their position in equities for the first time since the 2012 eurozone crisis. Executives are “cashing in their chips”, reports Matt Egan on CNN. Data from TrimTabs investment research shows that “August is on track to be the fifth month of the year in which insider selling tops $10bn”. The last time that happened was 2007, right before “the last bear market in stocks”.
Those pinning their hopes on the US Federal Reserve to provide relief were disappointed, says Jeremy Warner in The Daily Telegraph. Fed Chairman Jerome Powell’s hotly anticipated Jackson Hole speech proved a “damp squib”. The market shrugged off his promise that the Fed will “act as appropriate to maintain the expansion”. In times of uncertainty – be it about the trade war in America or a no-deal Brexit in Britain – most corporations conclude that “large scale investment is simply not worth the risk”. Pushing already low interest rates lower “is not going to change that mindset”.
“After years of easy monetary policy, central banks are impotent” because they lack the firepower to stem the next crisis, says Reshma Kapadia in Barron’s. Financial advisers report that clients are most concerned not about geopolitics, but about a looming “debt-bomb” caused by yield-hungry investors taking on foolish risks. The trouble is that no amount of easy money can solve that – indeed, it caused it. Cold wars are bad for your portfolio
A broader problem, as Alexander Chartres of money manager Ruffer points out, is that a new cold war between the US and China is under way. Over three decades the opening of China’s economy has driven global economic growth and kept inflation low. Logically, as Washington and Beijing unwind their economies and globalisation goes into reverse the resulting fallout will affect “everything in your portfolio”. Data shows that investors are reacting by shifting into cash, despite the miserable interest rates on offer, say Siobhan Riding and Emma Agyemang in the Financial Times. That will give them cash to deploy if stocks fall. UK investors, for instance, need not look far to find cheap “unloved companies” (see below).
British stocks: a happy hunting ground
Is Britain “uninvestable”? Analysts are “pretty much unanimous” in calling for investors to steer clear of UK shares until there is more political clarity around Brexit, says Bloomberg’s Ksenia Galouchko. JP Morgan argues that the FTSE 100 is in a “lose-lose” situation. Markets hate no deal, of course, but even if Johnson pulls off an unlikely agreement the resulting sterling rally will see the profits of the export-heavy index take a hit.
Yet no-deal uncertainty notwithstanding, plenty of investors already spy opportunity in Britain, reports The Sunday Times. Pub group Greene King has become the latest public company to capitulate to a foreign buyer. With sterling so cheap and private-equity firms flush with cash, UK stocks are proving a happy hunting ground. Dairy Crest, Merlin Entertainments and Just Eat are among the names to have been taken over this year.
The buyouts are a sign that it is time to be “very positive” about the UK stockmarket, says Garry White in The Daily Telegraph. Robust household spending and the promise of a fiscal splurge should keep growth ticking over. Owning FTSE firms with significant overseas earnings is a hedge against further declines in sterling. Andrew Garthwaite of Credit Suisse notes that on some measures, such as dividend yield, stocks are on 20-year lows. On a cyclically adjusted price/earnings ratio of 16.6, Britain is better value than virtually all other developed markets.
Low valuations imply healthy long-term returns from here. But steel yourself for more volatility. White recommends taking “advantage of any wobbles should they present themselves” rather than going all in at once. “UK equities are cheap – but they may get cheaper before the recovery finally comes.”