nothing to fear but fear itself

The OECD released its latest interim report on the global economy and pointed out the usual concerns that currently make front page news. Trade wars, Emerging market concerns over a rising dollar, monetary policy, Brexit and the risk Italy causes further problems within the euro area. Everything we know, sometimes it would be helpful one would feel if these forums provided new insights or areas of concerns that the markets are not necessarily focussing on. Despite all these concerns they have only slightly moderated their estimates for global growth for this year and the next. The global economic growth they forecast for 2018 they now have at 3.7% from 3.8% and the following year, maybe slightly counter-intuitively they have marginally higher at 3.8% in 2019, down from 3.9%. One must bear in mind the OECD, in 2007, “believed the current economic situation is better than what we have experienced in many years”.

Developed equity markets have recovered in the past few days as the dollar has paused for breath, as Emerging market indexes have risen along with the currencies. There is so much talked about crashes, preparing for the next crisis, this does not help the equity market cause. Engaging in a little analysis of returns from the FTSE All Share since inception in 1985. In terms of total return there have been 6 down years, interestingly in 1987, one of the most famous market meltdowns, was not one of them. Of the six only two have been more than 20% and both this century 2002 and 2008, 22% and 29% respectively. In both cases the following year virtually all those gains were recovered. The fact that two most violent corrections have happened so recent in history must account for such a continued high fear factor for equities. Since 1985 total return has annualised for the FTSE All Share has returned almost 10% annualised.

What this appears to reinforce is the underlying thesis for investing in large capitalised companies, over time is a sound way to save your money. It also underlines that equities have risks over the short term and being a seller on the falls is not wise. It is also important to reinvest dividends as that return falls to 5.86% in absolute terms.

We all fear stock market corrections and hate the obvious pain, but this analysis also goes to prove Warren Buffet as he gets greedy when everyone gets fearful.

A lot has been made of the flattening of the US yield curve, in contrast not much has been said about the rise in steeping of the UK yield curve. If a flattening yield curve is meant to signal concerns about a recession a steepening one should suggest that, despite Brexit, sentiment has improved for the UK economy post recent data.

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Posted on September 20, 2018 .