FROM CUSPS OF CHANGE TO BONDS
MANAGING DIRECTOR, ARTEMIS
CAUGHT between corporate news that is good and macroeconomic news that is bad (or, rather, not as good as it was), investors are understandably unsure. A “flight to safety” is still the default for investors – and that’s bad for equities.
What, we wonder, should equity investors pay for £1 of future earnings? The data available goes back to 1861 and so we asked ourselves how that year compares with 2010. The world then was on the cusp of considerable change, shifting towards a consumer-orientated, scientifically adventurous future. In the US, the eponymous William Wrigley Jnr was born. In a then greater Britain, so was Morgan Robertson, who would go on to invent the periscope in 1905. In Russia, Nikolai Rysakov, who in 1881 threw the fatal bomb at Tsar Alexander II, was fomenting nicely.
And yet in 1861, at the first big battle of the American Civil War (Bull Run at Manassas, Virginia), the most advanced piece of artillery there was a muzzle-loading smoothbore cannon which would have been perfectly familiar to those who fought at Waterloo. The last public execution in England was about to take place – just as compulsory schooling was about to be introduced.
My point? That progress in the markets, as in the broader affairs of our bittersweet species, is rarely linear. It rocks first forwards – and then back. More than 1.4m Americans filed for personal bankruptcy in 2009, a 32 per cent increase on the previous year. Whether public or private, the demands of debt will not be denied. But they will be resolved and, beyond this present and understandable volatility, all will be (unevenly) well.
For example, we look forward to the results of the stress tests for European banks, which will be announced on Friday. The US experience last year, as you may remember, was that those banks that failed the tests simply issued fresh capital. “Europe is different,” the learned say. We reply: “Why?” The Greek banks have a segregated IMF pool of €10bn on which to lean. So we expect a rally in bank bonds to build from Friday – but of course we might be wrong.