In an upside-down world, how do you find your feet?
Reasons beyond fundamental valuation metrics now cause unusually big moves in global stock markets
It is no longer unusual for stock market indices to have big intraday moves, either way. Even the mature, highly traded S&P 500 index (a proxy for aggregate US corporate performance) regularly moves up or down by a couple of percent a day. Individual companies’ values can move by multiples of that.
Sometimes there are valid facts (such as an earnings update or discovered fraud) which can cause extreme changes in company values. We expect that. But in the absence of material factual change, reasons beyond fundamental valuation metrics now cause unusually big moves.
Moves between indices and across geographies are likewise getting bigger, inconsistent, and less easy to explain, let alone expect or predict. Tried and tested valuation techniques are no longer universally valid (although their purpose wasn’t ever to explain short-term variations).
Like it or not, companies and countries operate less and less in a vacuum. External factors and the behaviour of others play a huge role. We are sensitive to and often influenced within seconds by a chirp (call it a tweet, if you like) here and there, and we’ve technology to thank for that.
Tweets are presumed to have substance, regardless of how qualified the author is to express an opinion, or even whether the information is factual. It used to be quarterly earnings reports and trading updates, as required, in a standard format. Valuations, one way or another, were just present values of future cash flows (growth prospects), supported by some capitalisation of past earnings evidence.
Nowadays things are different. Client acquisition strategy is the new thing and actual profits must stand aside for growth in users who are initially attracted at a cost, to be “harvested” later (I’m being kind). We’ve got to understand that now, or at least the crowds and computers have. Data is money.
It’s the exogenous variables and forces we must watch out for now. Disruptors come out of the woodwork in no time and their effect on the established businesses they will replace can be devastating. The new kids on the block are not standing by for the old guard. The rise of the new and the fall of the old is happening much faster than ever before. Access to global markets, leverage of human capital and connectivity are to be thanked for that. Modern disruptors are replacing established businesses, not just competing with them.
Politics plays a huge role. A presidential tweet can fundamentally change future trade partner expectations, or the sovereign cost of capital. The effect of the US-China trade war, to whatever extent it happens, will be overwhelming. There’s almost daily uncertainty and a lot of tit-for-tat. We all know how those spats end up – they destroy value (for both sides).
Across the globe, but particularly in the emerging superpowers, the role of the state has increased and the effects of its policy changes are felt immediately. Tariffs and incentives are the new sticks and carrots. The mood is around protecting your own and fighting the rest. That’s all very well for getting the popular vote, but it limits the very growth and development funding that global trade enables.
Monetary policy is firmly back in focus. The stimulus measures applied to rescue big business (read banking sector) are scheduled to come to an end in Europe and the US. Not everyone wants the help to go away, and that indecision drives volatility. I’ve never been convinced that monetary easing and its implicit currency effects were the medicine required to effect a permanent cure. Effects on emerging markets are particularly acute as the fights against inflation and currency weakness continue every day.
In time these significant and immediate-term impacts begin to change investment psychology. Instant gratification capital is stealing a bigger and bigger slice of total investment capital. Long term, asset-based projects are becoming more difficult and expensive to fund.
One consequence is that this responsibility falls increasingly on the state – to drive major capital investment or, at least, partner it in some form, including policy incentives and protections. In turn, that makes the state even more powerful and necessary – but completing that circle isn’t always virtuous.
Conventional wisdom has always been that if you invest in the real economy, you’ll be fine. Ignore these newfangled ideas, build a factory. I’m not sure that will hold entirely anymore; a new balance is emerging.
• Mark Barnes is CEO of the Post Office.