After 18 months of falling returns better times may be close but are by no means guaranteed
Freddie the fund manager is just back from his holiday in Ayia Napa and bounces into the office hoping that, in the couple of weeks he has been away, the global slowdown has run its course and a comeback is imminent. He's certainly up for it. The portfolio is awash with cash and he's had time, between the bar and the beach, to dream up some cracking ideas.
Freddie's confidence is boosted because most of the City's highly paid economists are saying the revival of key markets is due any moment. His institutional clients, although a little nervous, are desperate to believe the 'buying opportunity' story, so they keep telling him he's a genius. Marketing departments, meanwhile, are under some pressure, so they are grabbing at the few remaining straws of data that suggest growth is ready to resume.
It is entirely understandable. UK consumer spending has indeed been surprisingly resilient. The series of US interest rate cuts should by now be having some effect and it has been a horrible company results season everywhere, so things can only get better. After 18 months of falling returns in treacherous markets, investors may feel they are due some good fortune. But there is no law that says bad news must be followed by good news and fund managers and marketeers who insist to gullible punters that higher returns are just around the corner do no-one any favours. The economic cycle keeps turning but it is not, unfortunately, perfectly spherical.
Financial news pages are dominated by headlines about weakness, pressure, resignation, decline and collapse, while personal finance columns are filled with breezy tips on when to spot the bottom of the cycle and jump back into the markets again. Investors are clearly still reluctant to take on board what stalled economic growth means. Until they are, further downside surprises are inevitable.
Transmission of financial information is so rapid that market players must engage in multi-layered games of bluff and counter bluff. If a share price is plunging, does that represent the fundamental economic picture, or a temporary blip as some large player tries to flush out smaller fry? If everyone is watching for the first sign of a revival, when is it the real thing?
This is no environment for novices and yet simplistic technical advice abounds. Lifetimes of experience are passed on in 500 words as Sunday afternoon readers are invited to master the intrigues of the derivatives market or challenge the strategies of hedge funds before tea. For every asset manager who actually understands how these work and, more importantly, how to make money from them, there are dozens of dangerous amateurs.
Sentiment-watching has become a favourite past-time, with the 'darkest hour' supposed to yield the biggest bargain. But in the UK, we are nowhere near the low point. Companies may be suffering from 'low visibility' but results are still coming in below expectations. Soaring property prices remain the talk of dinner tables and consumers are spending furiously. Job losses are mounting but there are some very fancy redundancy deals around.
The truth is, sentiment is not nearly gloomy enough yet. Market bulls have to truly repent before they are forgiven. At the moment, they are angry and frustrated that they have been caught out but they are ready to sin again. We may just get deliverance by year-end but it is more likely we haven't seen the tail of this recession yet, let alone the sting in end of it.
What made financial headlines over the weekend?
Went into administration April 2018
Threat of legal action looms over Woodford IM
View from the front row