Tom Welsh speaks with City veteran David Buik about his career in the City, his views on central bank intervention and the Eurozone, and what to expect from City A.M.’s 2013 Active Trader Conference
Q How did you first get involved with the trading world, and how has it changed over that period?
A I have lived through 51 years of trading and seen breathtaking changes – many of them improvements. When I joined Philip Hill Higginson Erlangers in 1962, markets were small. Bankers were enthusiastic, “offers for sale” as we called them were plentiful. Over the next 25 years equity, bond and foreign exchange markets mushroomed, with London the centre of the universe. In 1979 came the abolition of exchange controls, which triggered the arrival of nearly 200 banks into London. In 1986, the Big Bang provided even greater stimulus. US and European investment banks became virtually omnipotent. London was the city to raise capital, finance foreign trade and to voraciously trade financial products and their derivatives. Foreign exchange trading was particularly potent.
Q You will be speaking at this year’s City A.M. Active Trader Conference about the influence of politics on the markets. What will you be discussing?
A When one talks about the influence of politics, it is all about the relationship of the central banks with their respective governments. The Fed and Barack Obama seem to go hand in glove, with Fed chairman Ben Bernanke more often than not pandering to Obama’s exhortations to stop worrying about debt and borrowing. This should terrify sane people. There seems to be a similar relationship enjoyed between the Bank of Japan and the country’s Prime Minister Shinzo Abe. European Central Bank president Mario Draghi seems to have worked out how to deal with Angela Merkel. The other EU politicians are rather irrelevant. Clearly bond markets and exchange rates are more vulnerable to political nuances. Equities, by comparison, are more robust.
Q The risk of political discontent derailing the Eurozone has been a big issue recently. Do you expect more instability to come?
A The EU is a political shambles. The 27 members can’t decide what they want for breakfast, let alone policies that will unify the EU. In the circumstances, Draghi does a great job. I have always held Christine Lagarde in high regard, though I believe her to be a toothless tiger at the IMF. She would be a more effective President of France.
There is no chance of the euro being disbanded, however, as most of the constituent countries are joined at the hip and they are too financially committed. In the long term, Greece and Cyprus will leave. They will not be able to adhere to the fiscal criteria of the Eurozone. I also think they will be better off out than in. Their devalued currencies will make them more competitive. The banking sector has had several years notice; so if it has not taken the opportunity to make provisions against this possibility, I have little sympathy. The popularity of anti-euro and anti-EU parties may well gather momentum but the die is cast. All constituents are too heavily interlinked to pull out with exception of the Hellenic countries and the UK.
Q What has been the most significant driver of recent market movements?
A Equity and bond markets have found themselves on a life support machine that goes under the pseudonym of quantitative easing (QE) and central bank intervention. But one day the kissing is going to have to stop (although by the time it happens, I suspect that I shall be on a Zimmer frame).
It only took a few months for the power of QE to capture investors’ imaginations. With the Dow up some 135 per cent since March 2009, the FTSE having rallied 95 per cent in the same period and the Nikkei up 50 per cent since Abe become Prime Minister, the proof of the pudding has been in the eating. However alternate asset classes have proved very unappetising. So with large international companies, which are not necessarily decent barometers of their respective economies, increasing profits and paying decent dividends on a consistent basis, it has proved to be a no-brainer to stay in the equity game.
But the moment the QE game is up and markets turn bearish, look out. It’s tin hat time! Some shares could see double digit losses.
Q What big risks should traders be conscious of?
A What terrifies most people involved in trading and broking equities is the lack of liquidity in the marketplace. It seems quite a disorderly place to do business. What do I mean by that? Five years ago the market makers were very much in charge of the market. Today they have less influence than they would have hoped for. Large fund managers call the shots today. That is fine when we are in a bull market which apart from healthy corrections, we have been in for 4 years. But investors have no protection, as the stock is in sometimes unknown hands.
Q What advice would you give to traders?
A My advice is simple. Beware the withdrawal of QE and stimulus packages. We live in a bubble. The level of volatility will know no bounds and equity geeks could well be the recipients of a serious larruping. It will be a very dangerous environment. All QE has done is bought time, while the banks were moribund. Investors need to be very circumspect.
David Buik is market commentator at Panmure Gordon & Co. He will be speaking at this year’s City A.M. Active Trader conference on 21 June 2013 at The Grange Hotel, Tower Bridge, London E1 8GP. Early Bird Tickets are now available for just £45 from www.CityAMactivetrader.com