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Colin McLean: summer time, and the investing is uneasy

Colin McLean: summer time, and the investing is uneasy

Summer is a special time for stockmarkets. A dearth of company reporting creates a news vacuum, sucking in politics, commodities and currencies. Low trading volumes do not help either – low liquidity creates fertile ground for sharp share price moves.

Investors are pulled out of their equity analysis comfort zone. If history is any guide, the next few weeks will bring some scary headlines. Some rules are needed to keep emotions in check.

Already, warning signals are easy to find, including the uneasy calm that has been a recent market feature. Implied VIX volatility has only closed at below 10 on 11 days in the past 20 years. But, most of those days have been in the past month. Realised volatility on the S&P index is now at its lowest level since 1966.

It looks like investor complacency, but in some sectors, such as technology and mining, share prices have been far from calm. And recently, the technical indicator, the Hindenburg Omen, which presaged the crashes of 1987 and 2008, has reappeared.

This is meant to highlight uncertainty over market direction, with an unusual number of stock highs and lows at the same time. But, it has not always meant a correction is coming. Its success rate is mixed, with one-third of its signals being false.

Credit markets are unnerving, too. Junk bond spreads are now narrow, offering relatively low yield pick-up over US treasuries. Troubled borrowers are finding lenders still keen to give them more.

Argentina, for example, has filed for bankruptcy three times in the last 25 years, but its recent 100-year bond issue was subscribed more than three times over in a yield of under 8%. Even troubled Greece has seen its 10-year government bonds steadily trading better to what now look like normal levels for a solvent nation.

Credit in other areas is troubling too; ranging from China’s state enterprises to US auto loans. In the UK, consumer borrowing has risen since the Brexit vote, keeping the economy buoyant even as real wages are squeezed.

And, while the European Central Bank has flagged concern about possible overheating in Ireland, the European Banking Authority has noted the high level of non-performing loans around Europe’s periphery.

As yet, there is no European plan to resolve these troubled assets. Recent interventions by Spain and Italy to deal with their own problem banks raise new questions, as they show there is no unified resolution mechanism for ailing banks.

In the UK, the Co-op refinancing has involved its bond holders losing more than half their capital. Each of the different bank resolutions highlights the inconsistencies underlying the euro, with increasing blurring of lines between risk borne by bank creditors and the euro liabilities of the European Union (EU) as a whole.

Trade frictions and international hostilities are another fertile source of summer scares. To date, president Donald Trump has not been as aggressive on trade as was feared.

But now, it is the EU that has launched the first attack, with its $2.4 billion fine on Google. This brings European policy directly into conflict with the US technology giants, striking at their core business models. US retaliation seems likely, and this could unsettle the previously strongly performing technology sector.

Regular contact with companies usually reassures investors, making it easier to put macro and political worries in context. But the summer break removes that comfort blanket, leaving few facts to challenge any alarmist headlines.

Governments and central bankers know they can get more attention at this time, and see it as an opportunity to nudge investor behaviour or stockmarket direction. They understand the cognitive dissonance involved when investors try to reconcile the emotion of the front pages with the facts and figures of the business sections.

When the facts are not on hand, emotion usually wins. Investors should enter the holiday period with a plan. Sitting in cash alone may not be the best tactic, but certainly a degree of liquidity can be used to take advantage of any market panics. But the best policy is to set some rules. Not making decisions outside the office, is a good one.  

Colin McLean is founder and director of SVM Asset Management. His UK Growth fund, run alongside A-rated Margaret Lawson, has returned 31.5% over three years versus a peer average of 25.4%


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