Unhappy markets
June 8th, 2010
Share markets have remained weak, subject to negative rumours about the Euro, sovereign debt, the slow pace of western economic recovery, Chinese overheating and the after shocks from the banking crisis. For sterling-based investors a typical world index ETF rose by 41% between 10 July 2009 and 25th March 2010, before retreating by a little over 9%. It remains 28% above the July 10 low last year. In contrast, a Japanese index ETF rose by just 18.5% from 10 July to 15 April 2010, before falling by 12%, almost back to where it started. An ETF following the Eurofirst 80 rose by 41.5% to 14 October 2009, and has now lost 23% from that high. It is now just 9% up on July 10 2009.
Some of this variable return reflects currency changes. The Euro has been weaker and the dollar stronger. The US accounts for around half the world index. More of the differential reflects different prospects for recovery and growth. Euroland is seen as slow growing at best, and now is subject to the possibility of no growth or worse in the weaker member states, facing public sector cuts and higher interest rates. Japan had a brief period of good performance earlier this year on hopes of export led recovery. Now there are fears that domestic demand remains depressed whilst the headwinds against more world trade hit an export oriented economy like Japan.
We have been asking ourselves whether we should now recommend buying into Japan, Euroland and the UK, as we have kept out of them during the last three years. The bulls would argue that Japan could now benefit from investors buying the yen as a less bad currency than some of the others available. Despite some currency appreciation, the argument would run, Japanese export businesses in cars, electrical and electronic equipment and other machinery remain world class and will benefit from the general upturn in world growth. Euroland will, say some, muddle through. Meanwhile the lead economy, Germany retains great exporting capability. The UK under new management is showing some concern to cut public spending and get a grip on its deficit. Meanwhile the large devaluation of the last couple of years gives it a more competitive edge.
We see all those arguments, but still do not want to buy into those share markets. The performance of Japanese shares since the bursting of the Japanese bubble in 1990 shows what can happen to real assets after a Credit crunch, and shows how difficult it can prove to rekindle faster growth once an economy has stalled. Japan is not over her deflation in an ageing society. Euroland has not yet decided whether to centralise and make the transfer payments necessary to get the union to function, or whether to shed some economies from the zone so the Euro can function well. If Germany left the others could devalue to a more competitive level, or if the weakest members left the zone could regain some of its currency strength. The UK still has to demonstrate its capacity to take out public sector costs whilst at the same time making the economy more attractive for entrepreneurship, investment and growth. We are watching to see how the new government fares in organising the turn round.
We have been advising investors against Japanese, Euroland and Uk shares. We still advise them not to regard these as long term real asset holdings necessarily capable of paying future pensions, future charitable wage bills or meeting future family needs. The Japanese equity returns have been very poor ever since 1990 and are a warning. The returns on western developed country shares generally have been poor for a decade now. The difficulties in settling the Eurozone and the need for a rapid turnaround of the UK’s fortunes have made us cautious so far about these investments.
