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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Unlike the ultracrepidarian columnists at other papers, I have no special endoscope to see inside the Iran regime — nor the brain of President Trump. As the war clocks up a month, what happens next? I haven’t a clue.
I do have a beard as grey as a koala’s bum, however, so I can tell you that markets have already discounted every permutation of outcomes to the conflict already. And that includes the worst ones possible.
Prices incorporate rosy endings too. But we know fewer investors lean this way because risk assets have generally been weaker since February 28. They also leapt on Monday, following supposed “very good and productive conversations”.
Hence, I’m of the view the risks are asymmetric. If the Strait of Hormuz remains backed up, equities will drop less than they would rise if the passage were suddenly cleared.
Furthermore, there have been very few days of retail selling since the war began. Buying on dips remains in muscle memory. Professional investors, meanwhile, have reduced their exposure by using products such as exchange traded funds, rather than ditching shares outright.
Indeed, ETF activity has jumped to account for almost half of all US trades, according to Bloomberg data — a record. This has led to one of the biggest short positions in US stocks ever. Citadel Securities believes many of these transactions were placed by rules-based algorithms.
That means investors are desperate to push the buy button again — either in the flesh or via programme trades. Of course, if Iran really hits the fan, hedges come off and shares will be sold outright. Then prices get ugly fast.
But what could be worse than is imagined in the dark corners of people’s minds already? Boots on the ground? The bombing of civilian energy plants? Oops, there I go falling into the trap of sounding like I’m a military strategist or engineer.
You know what I mean, though. On the other hand there is so much bad news in the press that surely just a few days of turning on a TV without plumes of smoke in the distance would change the mood significantly.
And lots of positive stories have been missed. For example, if you want to punch the air like a tech bro I recommend watching Jensen Huang’s recent speech about OpenClaw. The boss of Nvidia reckons “it’s as big a deal” as the web.
Or how about the 13 per cent earnings growth Wall Street expects for the first quarter and those US consumers who just keep on spending? Also pushed aside by the Middle East were better than expected retail sales, industrial production and investment numbers in China.
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In addition, Warren Buffett’s successor has just bought a stake in insurer Tokio Marine Holdings, further deepening his commitment to Japan. And speaking of financials, banks around the world are smashing it. Even more so if interest rates hold up.
Because I’m no expert on global oil and gas markets (luckily my rival scribes all are) I spent some time this week reading the latest Working Papers from the IMF. A couple of them gave me food for thought, too.
The algebra caused horrible flashbacks of second-year economics, but I think one paper concluded that higher defence spending is good news for European growth. The other analysed how much debt governments can take on before output slows.
More than doom-mongers fear is how I read the results. At least for high income countries. It was also amazing how little “debt overhang thresholds” change. And why could some countries borrow more than others? A record of paying it back helps, as does good governance and having a large and developed financial sector.
I read this with interest (geddit??) as everyone seems to hate bonds these days. Global yields have leapt since the war began. But they were edging higher anyway on worries that government finances were stretched to breaking point.
All of which means that 10-year UK gilts, say, are paying a coupon equivalent to almost 5 per cent. Sounds tempting to me. I can buy them at a discount to par and, if peace breaks out, I have a good chance of making a capital gain. And tax-free to boot!
My Fidelity cash fund has the same yield without a chance of it rising in value. And let’s face it too — Britain scores pretty well on those IMF criteria, even if its politicians are the worst since I arrived in the country 35 years ago.
So gilts are worth a punt, I reckon. What else? As I wrote previously, earnings multiples have declined to long-run averages in Asia, emerging markets and, unbelievably, some US bourses too. Ditto the UK, not quite so in Japan.
I’m still not sure about Europe, IMF paper or no. What I do know is that Trump can hugely affect my medium-term performance. A few random tweets and stocks are suddenly 5 per cent up or down — almost a year’s worth of returns if I’m lucky.
Is there a way to boost my chances of dollar-cost averaging instead of being ravaged? My old colleagues at Deutsche Bank have devised a “pressure index” to measure how much financial pressure the president is under to back down.
Needless to say, it was sky-high seven days ago. The catch-22, however, is that when stocks, bonds and his approval ratings rise, the pressure Trump is under to be dovish falls. And vice versa.
Like a nicely balanced see-saw. Therefore, short of being Donald — or having the same surname — the rest of us have little hope of timing the market.
The author is a former portfolio manager. Email: [email protected]
Source:
www.ft.com
