A senior stockbroker told me the other day it has been the quietest July for trading in 30 years. Of course, our conversation, as we took shelter from yet another torrential Dublin downpour, did hint at the distinct possibility that the city’s investor population had fled the country. However, another factor was cited. The simple fact is that many investors are confused.
The daily dose of conflicting headlines as to economic recession or expansion, rising or falling future interest rates and inflation rate uncertainty does make forecasts difficult. But, possibly not binary. In other words, the outlook might not be all blue skies but nor is it Oppenheimer-nuclear awful. Perhaps, we should just view the headlines as Barbie-pink cautionary warnings rather than code red catastrophe. I certainly agree the signals are confusing but I’m more a Barbie guy than an Oppenheimer doomster. Here are a few developments I spotted this week which suggest some broKEN markets actually might be recovering….
The property market in China has been struggling for years as huge debt piles and rising interest rates met returns reality. However, shares of Chinese property developers listed in Hong Kong have started to bounce on expectations of supportive policy measures from the Beijing government. Apparently, the government is considering relaxing residential building restrictions and easing mortgage rules which have suppressed demand for years.
Improved Chinese economic activity is already seeing steel prices hit 4 week highs domestically. However, the rest of the global hard commodities sector has been on the floor as the dollar weakened to a 15 month low in recent weeks. Typically, a weak dollar helps commodities and analysts are suggesting commodities are due significant ‘catch up’.
In a nutshell, is the economic cycle capable of an upside surprise? The business surveys like the Manufacturing ISM in US or the ZEW in Germany would suggest an emphatic “NO”. But, equity markets are signalling better times ahead with US cyclical sectors, surprisingly, outperforming defensive sectors year-to-date.
And, if you’re looking for another critical cycle barometer where better than the banking sector. Only a few months ago the eyes of the world were on the US banking sector for all the wrong reasons. Now, the biggest 5 banks in the US have announced their Q2 results in recent weeks and each of JP Morgan, Citigroup, BOA, Wells Fargo and Goldman Sachs saw their shares rise sharply in the hours after earnings reports. Interest rates were definitely a profit boost. Trading and investment banking less so. Anyway, the bounce in share prices tells us expectations are cyclically low which means a lot of money might have to chase the market if the economic cycle is actually picking up speed.
Oh, and we need to be careful about suggesting “markets” are difficult. Yes, some asset markets are experiencing pain but private equity giant, Blackstone, has been around long enough to know there are always opportunities to make returns. In fact, Blackstone has just hit the $1 trillion dollar assets under management(AUM) mark three years ahead of plan, thanks to good growth in their private debt/credit units.
So, perhaps the key point is timing and trading is very difficult in a cycle. There are too many twists. As Buffett and the Blackstone crew will tell you the most expensive investment decision is to opt out of the markets. Stick with building a diversified investment portfolio and the miracle of time and compounding returns will do the heavy lifting while you read the jittery headlines.
