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THE INVESTOR
I
t is easy to forget as we go about our
day-to-day businesses that we are
living through the greatest economic
experiment in history. Ever since
Lehman Brothers collapsed, central
bankers’ policy has been focused on
preventing that nancial collapse bringing
about a wider economic trauma.
Its boldness has paid o , but it has been a
close-run thing – with global disaster kept at
bay only by the willingness of central bankers
to print money and support markets on a scale
that would have been inconceivable even ten
years ago.And given that no one has done this
before, we should not be surprised if the ride
gets a bit bumpy from time to time.
Markets have been hitting some of these
potholes for most of this year so far.The
previous year, 2013, was stellar for equity
investors, particularly in the developed world
as signs emerged thatWestern economies
were on the mend and con dence ooded
back.This year, the initial excitement has
faded and people are now looking more
carefully for signs of growth. Unfortunately
they have found rather more uncertainty
than they would like.
This is all part of a normal recovery, but
what is di erent this time is that the move to
normality itself created the seeds of a shock.
The great paradox of today is that, for
short-term traders, global recovery is seen as
bad news. Central bankers don’t need to work
so hard at providing economic stimulus but,
unfortunately, some investors have become so
used to the stimulus underpinning asset prices
that they can’t imagine what life would be like
without it.They have taken fright.
There is, however, an obvious antidote:
ignore the short-term noise and focus, as
private investors should, on the fundamentals.
In particular, they should ask: what is
happening to the global economy and what
does this mean for corporate pro ts?
This is where it gets interesting. Last year,
the belief was that company pro ts would
bounce back strongly; this year, as the results
have come through, it is clear that they have
– but perhaps not strongly enough.
Companies are growing, but growth rates are
slowing. Inevitably, this has fuelled doubts
about how long the recovery will last.
But there are also hopeful signs.The
shakeout in emerging markets is viewed as
the knock-on e ect of theAmerican decision
to reduce its stimulus.The truth is more
subtle.Most emerging markets peaked back
in 2011–12, long before Fed tapering
was thought of and company pro tability
has disappointed as economic activity has
tailed o .The interesting thing is that
companies in emerging markets have been far
less successful than theirWestern equivalents
when it comes to maintaining pro tability in
a downturn – perhaps because they have had
rather less practice.
However, lessons are being learned and
there has been a marked change of
management emphasis towards improving
pro t margins.There is a new wave of
professionalism in the way these leading
emerging market businesses are being run and
they are much more shareholder-friendly. So,
while it is true that the broad economic
adjustments needed in some emerging-market
countries may take several years to achieve,
we should see a return to pro t growth.
There is also a powerful case to be made
for Japan. Prices are already much higher
than a year ago, thanks to Prime Minister
Abe’s determination to get the economy
moving again; but experts suggest that the
leading Japanese exporters – the companies
we have heard about in theWest – still o er
good value.Their main fear is that any share
price rise will be o set by a fall in the
Japanese currency – so it pays to make sure
that this risk is hedged.
Broadly speaking, you could also apply
the same message to the eurozone.There
OPINION
OPINION
ANALYSIS
The boldness of the fiscal policy of central bankers appears to have paid off,
but the return to economic normality has sown the seeds of shock
ByAnthony Hilton
