There is a clear consensus opinion in the market this year. Pretty much everyone thinks inflation will collapse to near zero; that global stockmarkets will struggle; and that any compensating growth will come from China.
We can rarely see a consensus without coming over all contrarian. I feel more positive about developed equity markets this year than I have for a while. That isn’t saying much, but it does at least mark something of a change. James Ferguson makes the case for Europe well and I tend to agree with him (for once). I remain positive on Japan on valuation grounds. We are also warming to the US, particularly now that US retail investors appear to have given up on it (they pulled a total of $135bn out of the market last year).
On the economic side, employment may have begun to bottom (see my blog). There has been a parade of positive indicators as the effects of quantitative easing feed through, and there is some evidence that house prices have stopped falling. America might get back on track faster than you think. Economics aren’t particularly relevant to markets (valuations and money flows are), but there are definitely reasons to buy selectively – not least the fact that with record levels of cash on their balance sheets, big companies are bound to be tempted to keep going with stock buy backs.
On the inflation side, things are complicated. As the VAT changes fall out of the numbers, Britain’s consumer price index inflation rate is likely to fall temporarily. British and European banks are also throwing a deeply deflationary pall over our economies. But the inflation we have seen here in the last few years has been not demand, but supply driven. It comes from government (in tax rises), from a weak currency and the rising price of energy. All are likely to stay with us.
Take energy prices. Analysts think falling demand in the West will keep prices low. But there is surely just as good a chance that instability in the Middle East will keep prices high. There is trouble everywhere from Syria to Egypt, and Iran is on the edge of an exceptionally iffy year: its inflation is around 20%; oil production is at its lowest for a decade; and the rial has fallen 40% against the dollar in a month due to US sanctions aimed at disrupting the country’s oil sales.
There is also, as Ed Yardeni of Yardeni Research points out, trouble in Nigeria, where a state of emergency has been declared in parts of the country; as well as in part of Kazakhstan, where “oil workers have been protesting for months”. Commodities aren’t the obvious bet for investors that they were a decade ago, but it still makes sense to us to have holdings in the energy sector as a hedge against turmoil in the Middle East – and the ongoing consumer price inflation it might contribute to. Happy New Year.