Everyone’s getting very excited about all these ‘green shoots’ all of a sudden.
George Soros reckons that the “economic freefall has stopped, the collapse of the financial system has been averted”.
Meanwhile, the Organisation for Economic Co-operation and Development says that Britain is past the worst (yes, this is the same OECD that last month revised down its growth estimate for this year to -3.7% from -1.1% in November).
So just how excited should we be? The answer is, not very…
Good reasons not to take this bear market rally seriously
The good news for the global economy, is that activity has stopped collapsing quite as rapidly as it was. But as Steve Russell, investment manager at Ruffer, put it at our Roundtable meeting last month (MoneyWeek’s Roundtable: tread warily and watch out for deflation), the global economy couldn’t have continued to shrink at the rates seen in the first quarter, because otherwise there’d be nothing left of it.
So any uptick in activity just now is only to be expected. It might be reassuring to know that life goes on (how could it not?), but that doesn’t take away from the fact that we’re in for a long and painful adjustment period ahead. As HSBC chief executive Stephen Green put it yesterday, “there may be green shoots in terms of confidence, but the reality is that it’s too early to expect green shoots in the economic environment. The recession has some way to go. While there may have been a spring bounce, people don’t want to make financial commitments.”
And there’s also a very good chance that when the time comes to try to return our bent and broken economies to some semblance of normality, we’ll see another big slump. Because make no mistake, having near-zero percent interest rates and central banks churning out money is not a sustainable state of affairs.
These are all good reasons not to take the current bear market rally too seriously. But one thing the rally is doing, which will help out companies (though not investors) in the long run, is giving corporations every chance they need to raise money before everyone realises this isn’t going to last.
Why demand for shares could soon be swamped by supply
“De-equitisation” was a phenomenon of the recent credit bubble, with companies borrowing money cheaply and then spending it on buying back their own shares (rather than raising dividends, an infinitely preferable option for private investors). But now that debt is expensive, we’re starting to see the reverse – “re-equitisation”.
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So far this year, the total value of UK share offerings has hit a record £18.8bn, reports The Times. The latest companies to tap the markets are Travis Perkins, the builders merchant, and Lonmin, the platinum miner. They’re looking for £300m each. Last week it was private equity group 3i, and house builder Taylor Wimpey.
Even computing giant Microsoft is taking advantage of the improved sentiment to raise money, although this time in the corporate bond market. Because Microsoft is one of the few companies that still has a AAA debt rating, people are clamouring for the chance to lend the group money. The company raised $3.75bn, paying yields from 2.97% to 5.21%, according to the FT, in a deal that “was several times oversubscribed.”
Meanwhile, investment banks are rubbing their hands together at all the juicy fees they can rake in from this activity.
However, any companies looking to get their rights issues away should take advantage while they can. All this ‘re-equitisation’ is yet another reason why investors should be very picky about how they get back into the stock market. Basically, there’ll be a lot more shares hitting the market in the next few years. And more supply generally means lower prices.
But as we’ve pointed out several times in the past few months, just because we don’t think you should be buying a FTSE tracker, that doesn’t mean there aren’t decent individual stocks around – and the good news is that the quality stocks are mainly the ones that have been overlooked in the current rally. In this week’s cover story, we look at a few of them (Has the worst of the stock market gloom blown over?) – and in Friday’s issue, our Roundtable experts pick out some other safe stocks that you can rely on to see you through the ongoing financial turmoil. If you’re not already a subscriber to MoneyWeek magazine, subscribe to MoneyWeek magazine.
The next big investment trend
And for those looking for glimmers of where the next big investment trends might lead, there was an interesting story in The Times today. It’s the news that the Government wants to have ‘smart’ meters in every household by 2020. Now we hear these sorts of targets being announced and re-announced by the Government every five minutes, and often they look like simple attempts to divert the news agenda from more embarrassing events.
But regardless of how realistic the target is, the idea of a ‘smart grid’ – which is basically a more efficient, user-friendly version of the one we’ve got – is a good one which can only continue to pick up steam, particularly with governments across the world looking for ways to “stimulate” their economies. We wrote about the companies likely to profit from smart metering and a similar project to upgrade the energy grid in America in a recent cover story: How to plug into America’s $4.5bn energy upgrade. And we’ll be looking further into this and other ‘green’ investments in future issues.
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Are we headed for deflation or inflation?
Will world governments’ “quantitative easing” trump the contraction in the world economy, or are we all headed for a Japan-style deflationary slump? Martin Spring weighs up the arguments.