The Weekly - Travelling and Arriving

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04/03/2019
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There is a phenomenon with stock markets known as ‘buying the rumour and selling the story’.  This is also known as the difference between travelling and arriving.  More commonly, it relates to good news expectation or some exciting development that gets everyone’s pulse racing. The technology bubble is the best known recent case of this where the infinite possibilities of the internet were going to transform our lives and make billionaires of many. 

This certainly wasn’t wrong but it took ten years longer than everyone envisaged and no one had heard of Facebook, Amazon, Netflix or Google at that time. However, the ‘rumour’ or ‘travelling’ phase was the period from 1995 to 2000 when markets went ballistic and anything vaguely related to dotcom went stratospheric. 

When the millennium finally arrived, the bubble burst shortly afterwards and much of the profit that had been made in the travelling phase disappeared when the reality arrived. Investors suddenly realised that everyone had been caught up in the hype and in reality, most of the forecasts for earnings were profitless. Those that bought the rumour and speculation but sold the story on arrival were very wise, banked their profit and saw it for what it was - a bubble.

This phenomenon is a feature of human nature and the inherent greed and fear of the investor; anxious to make as much money as possible and not miss out when others are profiting, but also anxious not to lose money, especially when news headlines are reporting the sell-off as many start to panic. It also goes a long way to explaining why markets often appear blind to the reality of when a positive development arrives – this is because all the good news is already priced in.  Many an investor gets to the party late, not realising that the markets have been there for weeks - any upside is limited and a hangover is about to set in.

However, the opposite can also apply. When markets appear to be anticipating a doomsday scenario and sentiment feels extremely bearish, there is a point of maximum negativity where some investors capitulate and manage to sell at the bottom of the market cycle. An example of this is Christmas Eve just gone, when a multitude of negative stories appeared to combine into an environment of extreme weakness, not helped by thin holiday markets nor an overwhelming sense of desperation fed by the political turmoil. 

Since that point, markets have rallied with the MSCI World Index rising by 12% to the time of writing [1]. The FTSE-100 Index which also managed to hit a low on Christmas Eve, dragged down by the US market, has also rallied by 7.3% despite all the Brexit noise [1]. If anything, since the market lows, the intensity surrounding Trump and his tariff negotiations with China and the approaching Brexit cliff-hanger has become much worse, but the markets have been rising.

This is travelling and arriving in reverse. The travelling period is the gradual realisation that the bad news that caused the previous low is fully priced in and all it takes is any glimpse of a ray of light for the gloom to lift. 

This is exactly what we have witnessed. Donald Trump desperately needs some good political news as his opponents start to stir ahead of the next Presidential race. He has taken the heat out of the 1st March Chinese tariff deadline by announcing an extension if a deal isn’t done by then. This implies there is a deal on the table and the much feared second phase of tariffs will be avoided. As Trump is obsessed by his standing in the media and judges his performance by the stock market, he realises that this will be seen as a political coup. 

Sentiment has also been lifted by the Federal Reserve reducing the degree of planned rate rises it has scheduled this year in light of softening economic growth. The anticipation of the negative caused the market low and, as we approach the reality, the worst outcome (which has so far failed to materialise) was priced in two months ago with investors seeing returns of up to 12% since this point.

Human nature defines the greed and fear characteristics of the markets. Over-expectation of the upsides and downsides leads to opportunity for the active and brave investor. It is often said that time in the market is more important than timing the market.  However, at times, extreme swings provide opportunity to boost the long-term returns that reward the patient investor. 

Brexit is another case in point. The UK equity market has been composed as we approach the 29th March without a deal. While it would be understandable that most have lost interest and just want some sort of resolution, it is rather more sophisticated than that. As many in Parliament lament about the removal of ‘no-deal’, the reality is that Theresa May needs that option on the table during the ongoing negotiations, because it keeps the pressure on Brussels as the German car industry, to name just one affected industry, predicts catastrophe.

The market sees two scenarios. First, a backstop fudge which delivers a majority in Parliament with the alternative being ‘no-deal’ or more likely, an extension to kick the can down the road to seek more time for a backstop fudge.  Either way, we get a deal but remember, this is only a deal for the withdrawal agreement before we start the actual trade negotiations.

Trade negotiations are interesting. Liam Fox, International Trade Secretary, is getting a hard time regarding the number of deals he hasn’t done.  Once we do actually successfully pass a deal (assuming we do) it would appear that we will then use the transition period to strike trade deals with all our trading partners, based on our current trading arrangements under the EU.  It appears to us that even if the EU says we can’t have our cake and eat it by trading with the EU on the same terms as previously, if we are able to replicate at least the same trading arrangements with the rest of the world as currently in place with the EU, then as far as that goes, we will be eating our cake. The issue lies with the EU itself and whether they choose to impose tariffs where they don’t currently exist.

The UK is a big market and a big importer of European goods. If German cars suddenly become 10% more expensive as with many other car imports into the EU, we doubt that the German car industry is going to take that sitting down. The same goes for French wine, Italian fashion, Dutch flowers or Spanish fruit. We could at last start to see some of the bargaining power that we don’t appear to have enjoyed while negotiating with the EU colossus over the withdrawal agreement. The UK is the 5th largest economy in the world and is currently experiencing stronger economic growth than both Germany and Italy, despite all the Brexit disruption.

Imagining an investment world without having to think about Brexit seems distinctly more positive than where we are today.  An investment world without the overhang of Trump’s tariffs on China also seems rosy.  Although his negotiations with North Korea have faltered, he can still advertise the fact that he is talking with Kim Jong Un rather than grandstanding about missiles and red buttons. He can also not be accused of caving in to achieve a political coup at home.

We hesitate to compare Trump and May, but both show a single-minded determination to pursue what they believe to be right for their country. Both are probably the most criticised leaders within the G20 and both have huge challenges to overcome. Most importantly, both are most definitely up for the fight and us mere mortals can only stand back and admire how an individual can put themselves through so much pain in pursuit of a goal in which they steadfastly believe. Both are driven by ego and power, but both also appear to have a sense of responsibility to leave their country in a better place once their era has passed. Perhaps this is what the markets are sensing. Despite the struggles and uncertainty along the way, we will soon experience a better economic environment with greater certainty and more prosperity for our nations.
 

Source: [1] FE Analytics – Accessed 01/03/19

 

Sterling rallies as no-deal Brexit fears ease

Sterling enjoyed its strongest week for a month, boosted by news that the Prime Minister will allow MP’s to decide on a no-deal Brexit if her updated proposal gets dismissed at next week’s vote. If a deal can’t be reached, MP’s can now delay Brexit from happening, preventing a cliff-edge scenario from occurring [1]. Of course, the EU has to agree to any extension but their appetite for no-deal situation is also likely to be minimal. The Pound briefly hit a 21-month high against the Euro before paring some of its gains to close the week at €1.163 whilst against the Dollar, it added +1.4% to $1.324.

Equity markets had a largely positive week as signs of progress regarding the US-China trade negotiations started to emerge. The S&P500 added +0.4% whilst the Shanghai Composite spiked by +6.8%, helped further after MSCI announced plans to quadruple the weighting of Chinese shares in its global benchmarks later this year. Meanwhile in the Eurozone, the German DAX30 and French CAC40 added +1.3% and +1.0% respectively. Closer to home, the FTSE100 pulled back by -1.0%, dented by the rise in Sterling which impacted its overseas earners whilst the more domestic focussed FTSE250 rose by +0.7%.

With no-deal Brexit worries waning, it was no surprise to see gilt yields on the rise last week. Government debt saw its heaviest sell off in nearly 18 months with the 10-year gilt yield rising by 14 basis points (bps) to 1.30%. US Treasury yields were also on the rise as investors digested better than expected GDP data. The 10-year jumped by 10bps to 2.76%.

In the Commodity markets, oil came under pressure due to further rises in US and Canadian supply; Brent crude declined by -3.1% to just over $65.00 a barrel. Gold endured a negative week, briefly falling below the $1,300 threshold before ultimately closing at $1,304 an ounce after a -2.0% decline.

Source: [1] https://www.businesslive.co.za/bd/markets/2019-03-01-brent-oil-prices-fall-on-us-supply-but-opec-cuts-offer-support/ - Accessed 04/03/19

Data sources: Datastream and forex factory - Accessed 04/03/19

 

The Week Ahead

Domestic economic data is in short supply this week.  Updated Purchasing Managers Index (PMI) data will gauge current levels of business activity within the Services sector on Tuesday. Services represent almost 80% of the UK economy and PMI readings suggest growth has fallen to meagre levels in recent months as Brexit uncertainty takes its toll.

Meanwhile, the US economy will see an equivalent Services reading courtesy of the Institute for Supply Management which has remained at a much more palatable level. The first Friday of a new month also brings the latest US labour report. The unemployment rate is forecast to edge back to 3.9% whilst non-farm payrolls are coming off the back of two bumper months which have lifted the three-month moving average to 241,000 jobs created [1].

Elsewhere, European policy makers are due to meet on Thursday for the latest European Central Bank meeting, though no change in policy is expected at this stage. In Asia, a final estimate of Japanese economic growth is scheduled for Thursday evening.

Source: [1] Forex Factory – Accessed 04/03/19