Figure 1 Where is Goldilocks when you need her?
Source: CNN Money

This is already proving to be another week of markets’ giving off rather too many Signals for comfort. For equities the simple correction theory, which seemed to be firming up by the end of last week is starting to look far too simplistic. The famous CNN Fear & Greed Index has not bounced back and the US January CPI data due out tomorrow afternoon is awaited with apprehension. There is talk of ‘regime change’ with an end to the era of low interest rates and low asset price volatility. Some fear the Halcyon Days to be over of the Fed ‘put’, essentially an insurance policy for investors allegedly instituted by Alan Greenspan and maintained by Ben Bernanke and Janet Yellen. On this basis, Goldilocks has fled leaving investors exposed to vengeful bears. As in personal life what really matter is not whether people ought to feel afraid but the fact that they do so and this is what has changed. Whether the fear will last is far from clear but it makes a full-scale resumption of the bull market less sustainable if not  less likely. Investors are now on the qui vive and much less confident of getting out quickly enough if the markets drops another shoe.

Figure 2: Nil desperandum for stock pickers

Source: Bloomberg

For what it’s worth, I think that the main, but not the only, thing to fear is fear itself.

  • The outlook for the global economy remains favourable for companies able to take advantage of it. The US market is not the only show in town.
  • Inflation is not about to take off in the US even if CPI inflation edges higher in January thanks to firmer oil prices. The spurt in average earnings, which may even be revised away, represents a catch-up rather than a systemic response to full(ish) employment.
  • The Fed will not over-react to anticipated inflation but will stick as closely as possible to its forward guidance, which it has been carefully crafting. The objective is to normalize monetary policy without choking the economy. New Chair Jerome Powell is somewhat inexperienced in such matters but his first comments suggest he will follow the Yellen strategy for a good while, including seeking to maintain financial stability. The 2018 FOMC has acquired a hawk in Loretta Mester replacing dove Charles Evans but pragmatists are still in the majority. This means three hikes in 2018 remains the base case but there will be fewer if markets start to crack.
  • The recent increase in US Treasury yields is healthy rather than extreme and should help both borrowers and lenders think more carefully and pension funds match their liabilities more easily.

These are not contrarian views but may in the short term fall on deaf ears amongst investors who have only seen the good times. Goldilocks is, after all, a fairy story and new strategies will be required to cope with the inevitable outbreaks of fear and the impact on ever larger passive funds. Fund managers and investment advisers will have to work harder to justify themselves. Seasoned stock pickers (Figure 2) should come into their own whether going long or short or simply shifting into cash from time to time. Chief Economist

Figure 3 Randgold Resources: numbers versus politics

Source: Google Stock Images

In the market volatility of last week it was surprising to see Randgold Resources (RRS) as one of the FTSE-100’s biggest losers.  Gold often has been a safe haven in times of market strife but the rise in the US dollar over the last couple of weeks hurt sentiment towards the shiny metal which fell in price. The move down was also surprising given the headline strength of Randgold’s full year results which showed record production, gold extraction costs at a six year low, a doubled dividend and strong free cash flow generation.  Mix in hopes of a new large gold mine development in Senegal as well as production extension opportunities at their mines in Mali, Cote d’Ivorie and the DRC and future opportunity appears good. However it is the latter geography which caused a shadow to fall over the results.  Randgold is one of the largest taxpayers in all the African countries in which they operate gold mines but sometimes success can cause disagreement.  The government of the DRC appears to want to renegotiate a new royalty code with mining companies active in their country and this extra uncertainty pushed the shares back. Gold mining is never easy especially in developing countries.  The better news is that companies like Rangold have seen all of this before.  Expect more high profile lobbying and ultimately before year end a deal which both sides can hold their heads up on.  Then it will be back fully to focusing on gold production, cost control and, naturally, where the price of the shiny metal is. Chief Investment Officer holds shares in Randgold Resources

Figure 4 BT Group: better tell Sid?

Source: IG Markets

For some months now companies that somehow disappoint are being hit by sell-offs and even shorting. This trend is no respecter of corporate names and may or may not be justified by company-specific factors. A fall from grace can gather momentum both if there really are problems or simply because a company fails to convince its sceptics. BT Group’s share price’s has been slipping lower since 2015 as the Group struggles to reassure investors about its pension fund deficits, its short long-term borrowings and even the sustainability of its generous dividend policy. Chartists are seeing patterns more worrying than the simple black line I have drawn on Figure 4. Management do have plans to change the business model but will need time. It is nearly 34 years since BT was privatized and if any of the mythical Sids (the highly successful marketing campaign had a slogan: don’t tell Sid) are still investors they may be concerned that yesterday Blackrock trimmed its holding from 5.35% to 4.99%. Investment Hub

By Alastair Winter

Chief Economist at Daniel Stewart