CHOICE LIVES AMID THE ANTITHESIS
MANAGING DIRECTOR, ARTEMIS
MARKETS have recovered recently. But is this a sustainable rally – or a “dead cat bounce”? There are cogent arguments for both bull and bear. The former begins with the observation that the outlook for global economic growth remains good. Indeed, the IMF recently raised its forecast for global growth this year to a respectable 4.6 per cent.
The prospects for corporate earnings are also sound and corporate balance sheets are strong. UK plc is sitting on more than £140bn of cash, equivalent to more than 10 per cent of market capitalisation. In short, equities look reasonably valued and are attractive in relation to other asset classes. Increased M&A gives equities further support. From Chloride to Scott Wilson, weaker sterling versus the US dollar means that any premium is at least part-paid.
The crux of the bear case is one dangerous word: debt – both public and private. The US will have a budget deficit of approximately $1.6 trillion this year. The average owed by every UK adult is 126 per cent of average earnings. Once, it seemed that governments could simply conjure away the Great Debt. But such supposed acts are, of course, mere illusions.
Sobering material here is the Bank of England’s most recent Financial Stability Report. It reports that our banking system is particularly vulnerable. It has more re-financing to do over the next few years than banks in Italy, France, Germany or the US: £204bn in 2011, which is twice the UK banks’ long-term borrowing average. Meanwhile, we all watch and wait for the Basel III liquidity rules for banks, due to be determined after the committee’s meeting that began today and ends tomorrow.
So things remain finely balanced. The only certainty, I think, will be continued volatility in the short-term at least. What should investors do in response?
Select stocks according to criteria that include strong balance sheets, free cash-flow yield, stable earnings and mostly non-cyclical sectors. Look for well-capitalised, quality business franchises, many with large overseas earnings. If investors seek out stocks on these grounds, they will find themselves happily spoilt for choice.