SUMMARY. Last month we were inclined to be positive, and newsflow and market moves since have justified this. But we cannot afford to be complacent.
Last month we were inclined to be positive, at least in the short term, for both newsflow and markets. Newsflow has continued to have a positive tinge, on the grounds that “less bad” is the new “good”, and markets have responded with a vengeance, particularly the sectors which had been under greatest pressure. One simple reason for this was that markets were heavily over-sold, overdue a bounce, and duly obliged. But there does appear to have been more than just this technical reason behind the rally.
For example, the latest US plan to clear out their banks toxic assets adopted the Colin Powell war doctrine – war is a last resort, which you pursue with overwhelming force. The size of the plan was much bigger than expected, and although, on reflection, there are issues around its practicality, it sent a very positive message, the US market went up 7% in one day, and has subsequently bounced in excess of 20%, with banks rising over 60%.
News coming out of the banks (US and UK) was positive and there was a growing sense that the banking system is healing, a prerequisite for a broader economic recovery. In the UK mortgage approvals in February rose at their fastest rate for 3 years, the Nationwide says house prices went up a touch over the last month (though Halifax said the opposite), and lending to companies also grew at its fastest pace for a year.
The dividend news also wasn’t as bad as the headlines might have suggested. For example, for the two weeks of 16th March to 27th March, of the 140 UK companies that announced results who had also paid dividends last year, the outcome was that more companies (29%) increased payouts than cut them (25%).
Intuitively it might not seem right that we can feel optimistic, even mildly, about the UK, which is pictured as challenging Greece (or Iceland, Italy, or Ireland!) as the sick man of Europe. Yet at a company level, UK businesses have been swift to slash costs and conserve cash, and head into this recession in dramatically better shape than the same stage in prior recessions, and the UK authorities, after some early hesitation, have acted vigorously to stabilize the financial system and limit the recession.
Weak sterling has helped exporters, and household finances are enjoying sharply lower mortgage rates and energy/fuel costs (providing you can keep your job).
Nonetheless, it would be wrong to be complacent, and there is much that could disrupt the positive newsflow. Increasing unemployment and a greater impetus to save, and pay off debt, could yet induce a lengthy period of shopping fatigue; the failed gilt auction was an early warning that international investors may baulk at the Government’s rising debt levels; and this is very much a global downturn, so we remain at the mercy of global events.
It cannot be said with conviction that the market lows are in place – this could be just another bear market rally. We will be keeping a very close eye on unfolding trends in coming days and weeks.