AS the countdown to Brexit continues, the pressure is building and we vacillate between the possibility of no deal and a delay of two months.
The impact on the economy has been to increase uncertainty for business and delaying the vote in Parliament is piling on the pressure.
Whilst it is almost impossible to ignore the “B” word, it is not the only important influence on stock markets, which is sometimes difficult to remember when the UK news is dominated every day by it. At the end of last week there was a slightly more optimistic feel in the markets about the US–China trade talks as Donald Trump appeared to offer an olive branch. The markets reacted very positively and the Dow Jones broke through 26000 for the first time since October last year.
With so much negative sentiment around, it is often the case that investors are pleasantly surprised, which actually is logical as bad news is priced in and thus surprises are more likely to please investors, meaning that prices are more likely to rise. Equity markets are partly predictable by using lead indicators such as dividend yield, foreign buying of US equities and the ratio of the money stock to share prices in the developed world, which measures the amount of cash investors have in their portfolios relative to equities. No indicators are infallible, but many are now pointing to a big rise in prices this year, of almost 30 per cent over the twelve months from December 31 2018 to December 31 2019.
We saw heavy selling by non-US investors of US shares last year (a bullish sign), so too is the fact that 10-year yields are above five-year ones. A negative technical indicator was removed last year when the fall in share prices in the last quarter raised the money-price ratio to its highest level since 2016. Nothing is guaranteed of course and this could all change very quickly. However, it does serve as a reminder that markets remain unpredictable.
Economic signals on a global basis remain mixed at best: in the UK consumer confidence is low, consumer credit growth has slowed to its weakest rate since 2014 and household borrowing has also slowed. These do appear to be purely negative, but the ratio of retail sales to the All-share index (which has proved to be quite an accurate predictor of economic fluctuations) shows that consumers are in slightly better than average spirits. This is partly due to real wages being on the increase, meaning that people need to borrow less and may even be able to afford to pay off a little debt.
What all this really indicates, is that making predictions is extremely difficult. The market is reacting markedly to any news or pronouncement at the moment, leading to relatively high volatility. In the UK this is likely to increase in the run-up to March 29 as nervousness increases. Overall markets seem very unsure of which direction to move in, which seems to indicate the most sensible course of action is to stick with fundamentals and be aware that drastic action may carry more risk.
:: Cathy Dixon is a director at the Belfast office of Cunningham Coates Stockbrokers, a trading name of Smith & Williamson Investment Management (SWIM). This article does not constitute a recommendation to buy or sell investments and the value of any shares may fall as well as rise. Investments carry risk and investors may not receive back the amount invested. The views expressed are those of the author and not necessarily of SWIM.
