- Huge savings flows continue to boost equities
- Risk that easy monetary policy is priming a bubble
- Greek debt imbroglio may become trigger for change
By Patrick Butler
In a Nutshell:
Despite negative news on the Greek front, divisions amongst the western allies on the best way to handle Russian expansionism in the Ukraine, clear signs of slowdown and financial stress in China and the appalling murder of a Jordanian pilot by ISIS, equity markets continue to be propelled upward by huge savings flows.
On Wednesday, the People’s Bank of China reduced the reserve requirement, freeing up around RMB 500 billion (c. USD 100 billion) for banks to lend, adding to the surplus of finance worldwide, fuelled by quantitative easing and lax monetary policies, which is searching for investment opportunities.
There is a real risk that easy-money policies are even now pumping up a bubble in asset prices which will ultimately burst. At some point lenders will start worrying about the degree of leverage of many borrowers and demand their money back. Equity investors will take fright.
A new McKinsey study shows that global debt has increased by $57tn since 2007 to almost $200tn — a much higher rate of growth than the real economy – reflected in debt’s share of gross domestic product which has grown from 270% to 286% over the period. “Overall debt relative to gross domestic product is now higher in most nations than it was before the crisis…Higher levels of debt pose questions about financial stability,” comment the report’s authors.
It remains to be seen what will catalyse a flight for the exits. It could, for instance, be the failure to reach agreement by Greece and its Eurozone creditors. Until that moment comes, however, the laws of supply and demand dictate a continuation of the current bull market.
Bullish equities power onwards despite worrying signals elsewhere. Pic: iStock
One report over the past week perhaps says more about the state of relations between the key negotiators In the Greek tragedy than all the public statements put together. During his visit to the UK, Greek finance minister Yanis Varoufakis reportedly asked his British counterpart, George Osborne, for German finance minister Wolfgang Schäuble’s mobile phone number. Osborne, so the report runs, asked Schäuble for permission to pass it on. The latter refused the request!
FTSE100 performance over the past week
A major underperformer last week was Tate and Lyle which issued yet another profit warning and ended down 15% on the five trading days. GlaxoSmithKline, in contrast, was up over 3% after solid, if unspectacular, full-year numbers. Investors are well-rewarded by a high dividend (the shares yield over 5%) and the prospect of a further payout when the asset-swap with Novartis is completed. Shares in Ocado rallied when it made its first ever pretax profit (of £7.2m compares with a loss of £12.5m the year before).
The US nonfarm payroll numbers on Friday were relatively strong, reflecting the impressive recovery in the US economy. The growth in employment experienced over the past year compares with the scale last seen in the expansion of the mid- to end-1990s.
This week watch out for the US January retail sales on Thursday. The figures are likely to be negative and the market may initially be troubled by this apparent weakness. These are nominal numbers, though, and reflect a large decline in fuel prices in January. In real terms, retailers are therefore expected to have turned over significantly more than in the previous month so the pace of expansion remains, in reality, unwavering. And on Friday, the University of Michigan’s preliminary estimate of consumer conﬁdence will probably rise strongly again.
In many Eurozone countries, Q4 GDP data are due. We believe there will have been a modest improvement in GDP growth across the region.
On Tuesday Cable and Wireless’ (CWC) trading statement will be interesting. It should reveal how the acquisition of Columbus International Inc. for approximately US $3 billion, announced last year, is progressing. Columbus is a privately-owned diversified telecommunications and technology services company, based in Barbados, with approximately 700,000 residential customers in the Caribbean and Latin America.
At the time, the deal was hailed by the company as transformational. “Together, we will create the best-in-class quad-play offering in the region, delivered on a superior mobile, fibre and subsea network." On the face of it, there are real synergies and opportunities to participate in the region’s growth, which is being fuelled by the strength of the US economy. The proof will be in the results – and this trading statement should offer clear insights. Last year CWC lost $70 million before tax. Investors will want to be reassured that the new strategy will ensure a swift return to profitability.
As indicated above, the FTSE is likely to remain in bullish mood unless and until it is brought down to earth through a shock development. This could be the breakdown of negotiations over Greece, clearer divisions among the allies over Franco-German appeasement of Russia – or something, as yet, unforeseen.
Key statistics and events:
UK corporate earnings announcements: Interim Result Renewable Energy Generation Ltd (WIND) Randgold Resources Ltd (RRS) Final Result Randgold Resources Ltd
UK corporate earnings announcements: Interim Result Vernalis PLC (VER) TUI Travel PLC (TT.), Final Result Entu Uk Plc Ord Gbp0.0005 (ENTU) Catlin Group Ltd (CGL) Millennium & Copthorne Hotels PLC (MLC), Trading Statement SABMiller PLC (SAB) Halma PLC (HLMA) ICAP PLC (IAP) Cable & Wireless Communications Plc (CWC) Babcock International Group PLC (BAB) Bellway PLC (BWY)
UK corporate earnings announcements: Interim Result Redrow PLC (RDW) Dunelm Group PLC (DNLM), Final Result ARM Holdings PLC (ARM) Reckitt Benckiser Group PLC (RB.) Telecity Group PLC (TCY) Tullow Oil PLC (TLW) Bank Pekao Sa (85PL) New Europe Property Investments PLC (NEPI), Trading Statement QinetiQ Group PLC (QQ.) Thomas Cook Group PLC (TCG) Homeserve PLC (HSV) Atkins (W S) PLC (ATK) Electrocomponents PLC (ECM)
UK corporate earnings announcements: Final Result Shire PLC (SHP) Morgan Advanced Materials (MGAM) Rio Tinto PLC (RIO) Informa PLC (INF) Lancashire Holdings Ltd (LRE), Trading Statement Darty PLC (DRTY) Tate & Lyle PLC (TATE) Imperial Tobacco Group PLC (IMT) UK Commercial Property Trust (UKCM)
UK corporate earnings announcements: Final Result Anglo American PLC (AAL) Rolls-Royce Group PLC (RR.) Riverstone Energy Limited Ord Npv (RSE), Trading Statement Severn Trent PLC (SVT)
– Edited by Clare MacCarthy
Patrick Butler is chief executive of the Prime Wealth Group
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