MANAGING DIRECTOR, ARTEMIS
PHEW. We all like a bit of excitement. But this is getting ridiculous. After the euro’s crisis and the forming of the UK’s coalition government, we could all do with a rest. If the FTSE 100 index could just get back to – and hold – 5,400 for a while, that would do. But the currency traders may not agree. The euro reached even lower lows this week. Caught up in these macro-matters, mere equities cannot advance.
Let’s all hope it settles down. Bond markets have been very stressed and volatile. That said, the premium that investors demand to hold 10-year Spanish bonds over German bunds, Europe’s benchmark, has narrowed to around 90 basis points from 164 on 7 May. Spreads on Portuguese debt have fallen by more than half to 163 points. The Greek spread was 442 points on Monday, after touching an alarming 973 last week. But if these spreads widen again then all bets are off.
The trouble is that while austerity packages from Greece, Spain and Portugal are encouraging, those governments must deliver. Deeds, not words, are what bond markets need to maintain stability. The UK’s Budget on 22 June will be critical for UK gilts.
But in general, regarding the UK we are sanguine. After all, 10 of the world’s 16 AAA-rated countries have a coalition government. Our last National Government forced through a painful emergency budget in 1931. But then, under Stanley Baldwin’s leadership, it still won the general election of 1935.
And assuming that the politicians do start to deal with their deficits, the corporate outlook is actually pretty good. Most companies are in rude health and profitable once again. For investors, the value is clear.
Take RBS and Lloyds, for example. Both are trading at only net tangible asset value. The government, let alone private investors, will need these banks’ share prices to rise. Better trading should see that anyway – if only bond markets and currencies can settle down, and be pleasantly boring for a while.