Wisdom for Wednesday!

The rise in the value of Snapchat lasted about as long as one of the photos taken on their App. The stock traded below its offer price on Monday as analysts continue to struggle with the valuation of a company that lost more money than received from sales last year. This turn in sentiment towards Snapchat did little to ruffle the feathers of broader equity market investors. The US dollar gained ground against its basket of currencies, however it did lose ground against the yen. Once again painting a mixed picture of risk appetite for the investment community.

Deutsche Bank, announcing its need to raise another eight billion euros from its shareholders. The bulk of the funds appear to be going straight to the Department of Justice to settle the claim of mis-selling security backed mortgages. This also, did not have an unduly adverse impact.

On Tuesday, the OECD released its latest expectations for economic growth around the globe. The OECD expect the global economy to grow at 3% this year, 3.3% next year and 3.6% the following year. If they are right, a big if, that should be good news for equities to remain supported. However this view is not entirely shared in the eyes of the OECD. The OECD refer to the global economy as being in a “low growth trap”, and that there is a disconnect between economic growth and stock markets.

By traditional standards they are probably right, however we do not operate in a normalised interest rate environment. Who can rightly suggest German big cap equities, which have maintained a progressive dividend policy, and now offer a dividend yield circa 3%, exposed to a growing global economy as the OECD predict, are expensive in a world when 10 year yields on German bonds are 0.5%.

One could put a very good case forward, using the OECD assumptions, for equity markets to remain resilient for the coming years. Assuming, according to the OECD, that we are in a low growth trap, fingers crossed, this would suggest inflation would stay subdued, interest rates remain close to historic lows, corporate earnings can grow in this environment and this would in turn support equity valuations. We can only hope the OECD are correct, sadly the likelihood is they will be wrong.

One just has to study their forecasts for the UK economy pre-and post-Brexit as an example. UK growth was given the biggest upward revision among all the major economies in today’s report. The OECD, according to Bloomberg, cite the introduction of monetary stimulus as the reason for the improved outlook. Hogwash, the pound was overvalued into the referendum and sold off before the Bank of England acted. Cutting interest rates was de minimis in the scheme of things. The quantitative easing just put further pressure on pension funds. The UK economy is benefitting from an improving global economy.

Posted on March 7, 2017 .