Readers of a certain vintage may be able to recall perhaps the singularly most ludicrous and cack-handed plot twist in television history when Bobby Ewing popped out of a shower at the start of the 10th season of Dallas, and as a result confined the whole of the 9th season as a bad dream of his wife, Pam. The producers and actor Patrick Duffy both wished to back-track on the decision to write him out of the programme at the end of season 8; however, they had taken the supposedly terminal act of killing the character off. Unabashed, they took the inspired decision to pretend that it never happened at all.
And so, we might feel a little bit like that ourselves over the first four months of this year. At the time of writing, the UK stock market has just about recovered the levels that it started the year at. Do we have the capacity to write the last few months off as a bad dream, and expect a return to the serenity of unflustered markets that we saw through 2017? As ever, the answer is not completely clear cut.
Looking at the argument from an economic standpoint, there is much to commend the position. The volatility seen over the last three months has not been particularly caused by economic data. The IMF has just upgraded its forecasts for global growth, US data has remained robust, and even if some of the momentum has come out of the European continental economies, they are still very much in growth mode. Specifically, looking at the UK the picture is more challenged, but not any more so than it has been for the last year. Even the progression of the upward march in interest rates here and in the US – which will definitely put pressure on valuation levels over time – should not have come as a surprise to anyone. On that basis, it is difficult to see any cause for such a sharp correction, and then subsequent recovery.
If the economic backdrop has gone relatively to plan, then the political situation has done anything but. Trade wars, cold wars, chemical wars, and nuclear wars are all front and centre of the global political consciousness. It is not a propitious backdrop to take a long term view on equities whose paybacks can only be crystalized over multiple business cycles. Fully incorporated into the equity risk premium, these concerns could easily justify a significant drop in the present value of future cash flows. Yet, if this is indeed the principle reason behind the first quarter sell off, then these issues have not gone away. As welcome as a cooling of the tensions on the Korean peninsula are; they are neither secure nor representative of reduced tension elsewhere enough to allay these concerns.
It may be that ongoing improvement in the general economic environment is now enough to exactly offset the increased risks from political dysfunction. If that is the case, then it offers a neat symmetry; however, it also poses the next question of where we go from here.
At first glance, it is difficult to see the overall global macroeconomic situation changing much in the short term. The key policy drivers in terms of monetary and fiscal policies in the major national are well established. The questions over rising interest rates in the US and UK, and the withdrawal of QE in the Euro Zone, centre on “how fast?”, and not on “if?”. For better or worse, the short term fiscal position in the US is going to deteriorate post the Trump tax reforms, whilst it will continue to improve in the UK and stay roughly static in Europe. Where we might see some positive changes is in relation to the UK consumer, where real income growth is now a realistic prospect for the first time in over a year.
Which leaves the key variable as the global political situation. There are early signs that in some quarters cooler heads are starting to prevail. For more than just our economic health, we hope this trend continues.
The other thing to have happened over the last four months is a relatively solid reporting season. As ever, there were a few shocks and surprises; but generally, it was a robust period of corporate reporting. As a result of the earnings banked over the period, our portfolio has more solid valuation backing than prior to the year end.
There is nothing to make us believe that we cannot make decent share price progress from here over the remainder of the year. The fundamentals are pretty much in place. Yet, the first quarter is a reminder not to take anything for granted.