Tales of the unexpected – Part II

Well, who saw that coming?  Not IG Capital, not FXCM (the world’s biggest retail currency broker), and not Alpari, the erstwhile shirt sponsor of West Ham United (who have form in this regard as in 2008, its then shirt sponsor XL Leisure succumbed to the recession).  I am referring, of course, to the Swiss National Bank’s (SNB) decision to allow the Swiss Franc to float freely against the Euro – which at one point led to a more than 30% increase its relative value to the main European currency.

The statement from the SNB accompanying the move tried to portray the move as part of the process of normalising the relationship between the Swiss Franc and the other main trading currencies.  The impact and response felt anything like “normal”.  It is almost certain that the increasing pressure on the European Central Bank to engage in full blown Quantitative Easing (QE) had a big part to play in the decision.  Whether the Swiss know any more than we do about the ECB’s plans for its next meeting is debatable; but it is unlikely that they wanted to be tied to an outcome that could have massive ramifications for the workings of the European economy over the next three to five years.

It is symptomatic, however, of the intangible pressure building on the ECB to finally do something, rather than telling world about what you might do.  This can cut both ways.  Certainly, Central Bankers are normally very wary of creating conditions that will come as a shock to financial markets.  That very factor may just be enough to convince the Germans that the costs of not employing a credible QE programme now outweighs the risks of devaluing the monetary base.  However, as Thursay’s events in Zurich showed, the need to avoid shocking financial markets is not the be all and end all in the minds of financial policy makers.

All of this suggests that the meeting coming up this Thursday (22nd January) is going to be really important for the direction over the rest of the year.  Our view remains that a sensible QE programme from the ECB (preferably directed at providing funds via the European Investment Bank for infrastructure investment) would provide a massive adrenalin shot for both equity markets, and (more importantly) the depressed economies on the European mainland.  Not only would the actual act of spending the newly created money stimulate activity, so we believe that the psychological impact of businesses and individuals realising that the governmental framework can deliver actions based on growth, rather than more retrenchment would be as important as the increase in the monetary base itself.  If the ECB chooses not to institute a major QE programme at this point, it is difficult to see exactly what circumstances would have to prevail for it to ever happen.  Therefore, the impact of any disappointment could be particularly grave.

Instituting QE now is all the more acceptable given the recent further lurch down in oil, and other commodity, prices; making any inflationary risk a long way off indeed.  When one considers that the Greek general election will take place before the end of January, it all adds up to an important and exciting month to start off the new year.

Yet, we would argue that February will be even more important.  We don’t have any great divination powers that let us know what that month’s surprises are going to be.  But we know for certain that it will kick off the 2015 reporting season for companies, and progress at a micro-economic level this year is crucial if 2015 is to deliver attractive investment returns in equities.  We have already heard from a number of the UK’s retailers – the picture for general retailing is largely in line with expectations; food retailing is nowhere near as bad as share prices had been discounting.  The housing market growth is moderating, but all the new housebuilders still expect to grow in 2015.  The absence of profit warnings from international and industrial companies suggests that their plans are still pretty much on track.  This statement obviously excludes those businesses with direct exposure to oil and other heavy commodity markets.  Share prices may have fallen to valuations that are potentially more realistic (or perhaps downright cheap in the medium term), but it is certain that at a trading level, 2015 is going to be a year of transition for many of these businesses.

Recent PMI data suggests that the edge has been taken off the growth profile of both the UK and US economies.  There is nothing worrying about that in itself, because in absolute terms they are still in strong expansionary mode.  But it likely means that (much to our Marketing Director’s chagrin) there are no free lunches out there, for either businesses, or their investors.

Exciting times again, as 2015 has picked up where 2014 left off.  However, by the time we write our next update, we will have a clearer picture of what kind of year it is indeed going to be.