Rensburg Sheppards: Facing up to anaemic growth

Jan 27 2010 By Andrew Bell, head of research, Rensburg Sheppards

HAVING started the year brightly, the equity markets took on an uncertain note from mid-January. The reasons are partly economic and partly political.

In the economic corner, investors have started to take a keener interest in economic data, whereas for much of 2009 sentiment was supported by the (correct) assumption that things would turn out more positive than the mood of gloom 12 months ago implied. Recent data have tended to be mixed in developed economies, fostering concerns that the recovery hopes will not be met. However, data has been stronger in emerging economies, creating fears that the resulting commodity inflation will create problems for the global economy.

China’s accelerating growth rate, which reached over 10% in the closing months of 2009, has already led to a modest tightening in monetary policy, making it the first major economy to have embarked on a reversal of the emergency easing measures introduced in late 2008. The combination of flaccid growth in mature economies and policy tightening in buoyant emerging economies is troubling, given the degree to which emerging market growth has helped to stave off the threat of global recession.

Worries about growth rates are exacerbated by the upward creep of inflation. Never mind that most of the rise is due to price falls a year ago dropping out of the 12- month numbers, the markets are in a mood to worry about inflation now that depression has been averted and most governments are presiding over ballooning budget deficits.

This is where the political side to market concerns kicks in. Given anaemic growth rates, there will be a temptation to delay moves to reduce deficits or for governments to tolerate higher inflation. It is also too much to hope that governments will take aggressive action while facing an election. Additionally, while there is a respectable case for delaying the impact of tightening until the economy is recovering more convincingly, it is important in maintaining investors' trust that the debate is properly focused on the need for substantive measures, even if the implementation is deferred. In the meantime, political fire has focused on high levels of banking bonuses, which have been fuelled by low interest rates, buoyant markets and what looks like bankers' tin ear.

Although more damage was probably caused by mistaken conventional lending decisions (on mortgages, commercial property and company takeovers) than proprietary trading, hedge fund or private equity activity, politicians are living up to the maxim that, if a fight breaks out in a pub, you hit the person you dislike rather than the person who started it. So, the row over regulating investment banks has piled on top of the economic concerns about growth and monetary policy to create a sulky environment for equity markets.

If the forthcoming 2009 earnings season lives up to expectations and the economic recovery endures through the fiscal and monetary policy eddies in months ahead, this should prove a transitional, if volatile, phase but the relative certainties of 2009 have been left behind.

Andrew Bell,

Head of Research,

Rensburg Sheppards