30 years

20 October 2017

This week, the 30th anniversary of two formidable storms in October 1987 reminded us that extreme weather and capital market events are not something that only started after the year 2000. While most long-term return charts nowadays show the 1987 stock market crash only as a tiny blip, the application of a base-effect cancelling logarithmic scale illustrates just why this stock market crash was so unsettling. It may not have lasted anywhere nearly as long as the later crashes that burst the 2000 Dotcom bubble or the 2008 subprime credit bubble, but its severity taught the 1980's privatisation investors that equity investment requires nerves in order to reap the longer term return reward. Many articles appeared this week, comparing 1987 and 2017 market conditions and warning that it could happen again. Of course it could. As long as the dominating emotions that drive stock market to extremes remain exuberant greed and apocalyptic fear, then extreme stock market volatility is always a possibility. But are our 2017 market conditions indeed comparable to 1987? In some ways yes, but in other important aspects they are not. The run-up to the 1987 autumn crash was characterised by exuberant investor confidence, with the UK stock market rising over 80% since the beginning of 1986, only to then close 1987 with just a 32% gain over the two years. The run up to October 2017 has seen far more pedestrian UK stock market returns, even if the cumulative return since the beginning of 2016 still amounts to a very respectable 29.7%(!). The other stark difference is the complete absence of investor exuberance. Quite the contrary, I frequently describe current investor sentiment as constant Armageddon paranoia, while other commentators have called the stock market recovery since 2009 as the 'most unloved equity rally in history'. In the absence of exuberant investor confidence, it makes more sense to look at the longer-term drivers of stock market stimulating corporate sector performance - the general and nowadays global economic outlook. This outlook has not changed recently and indeed the resilient and steadily increasing global economic growth momentum could be seen to lull stock markets into a sense of stability that may be illusory. There are many voices who note that markets appear to ignore the lurking risks as we can identify them aplenty. There is the risk of a hard or badly prepared Brexit because of the procrastination of exit negotiations. The populist tensions risks to the EU, arising from the looming constitutional crisis in Spain over the Catalan separatists' movement. Globally the prospect of a rising US$ and the damage it may cause to emerging market economies. Finally, a slowing economy in China whose new leadership team may choose to increase re-distributive measures rather than following down the path of a more purist market economy. Geopolitical risks like the tensions arising from North Korea's desire to be recognised as a nuclear power are even harder to weigh up. Why then have the previously so fickle stock markets become so seemingly complacent. It is most likely the return of steady and synchronised economic growth around the world and the improvement it brings to business sentiment that lagged so badly ever since the shock of the Global Financial Crisis (GFC). There almost seems to be a sense that decent levels of growth can even out many frictions and prevent '˜cold conflicts' from becoming '˜hot conflicts'. From this perspective, I dare to look back further in history. Given we find ourselves 10 years after the first signs of the credit bubble collapse appeared, it may be worth looking to the period of the previous financial crisis that followed the 1929 stock market crash. With the return of economic momentum and steady normalisation of the global economy and its financial framework, I would argue that 2017 is more reminiscent of the atmosphere of a new start that characterised 1949, than the forebodings of global disaster that were felt in 1939! We may not be quite there yet, but at least the global economy and the forward looking capital markets tell us that they expect conflicts to be resolved rather than ending in a proverbial '˜car'‘crash'. Until we know for certain we shall remain vigilant in our relentless monitoring of all moving parts in the ever-evolving total picture of global investment market and adjust investors' portfolios under the governance of a level headed and well-versed investment process.

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