Shares Magazine - May 24, 2018

AEQUITAS

24 May 2018 | SHARES | 39

Insightful commentary on market issues

The sudden reversals in the Turkish lira,
/ŶĚŽŶĞƐŝĂŶƌƵƉŝĂŚ͕DĞdžŝĐĂŶƉĞƐŽĂŶĚƌŐĞŶƟŶĞ
ƉĞƐŽĂůůƐƵŐŐĞƐƚŝŶǀĞƐƚŽƌƐĂƌĞ͕ƐůŽǁůLJ͕ƐƚĂƌƟŶŐƚŽ
ďĞĐŽŵĞŵŽƌĞƌŝƐŬĂǀĞƌƐĞ͕ĞƐƉĞĐŝĂůůLJĂŌĞƌƚŚĞŝƌ
experiences with bitcoin and trading the VIX
ŝŶĚĞdžĂŶĚĂŶŝŶŝƟĂůǁŽďďůĞŝŶƚĞĐŚ͘

Any chain is only as strong as its weakest link.
Whether this is a warning of further trouble to
come in more mainstream assets, such as UK and
h^ƐƚŽĐŬƐ͕ƌĞŵĂŝŶƐĂŶŽƉĞŶƋƵĞƐƟŽŶ͘zĞƚŶŽͲŽŶĞ
could have imagined that a downturn in Florida’s
housing market and the collapse of two obscure
ŚĞĚŐĞĨƵŶĚƐŝŶϮϬϬϳǁŽƵůĚďĞƚŚĞĮƌƐƚƐƚĂŐĞƐ
ŽĨĂƚǁŽͲLJĞĂƌĮŶĂŶĐŝĂůƉĂŶŝĐĂŶĚďĞĂƌŵĂƌŬĞƚ
in share prices.

DOMINO EFFECT
None of this mean indices like the S&P 500 and
&d^ϭϬϬĂƌĞĚĞƐƟŶĞĚƚŽƉůƵŶŐĞƐŽŽŶďƵƚƚŚĞ
ĐŽŵďŝŶĂƟŽŶŽĨůŽǁǀŽůĂƟůŝƚLJ͕ůŽŌLJǀĂůƵĂƟŽŶƐ
(especially in the US), and rising interest rates (at
ůĞĂƐƚŝŶƚŚĞh^ͿŝƐĂƉŽƚĞŶƟĂůůLJƚƌŝĐŬLJŽŶĞ͘
The good news is that earnings forecasts
ĂƌĞƐƟůůďĞŝŶŐŵĞƚŽƌĞdžĐĞĞĚĞĚ͕ƐŽĞƐƟŵĂƚĞƐ
are rising.
Real, near-term trouble for equity investors
could come in the form of a global economic
slowdown – or even an actual downturn – as that
ǁŽƵůĚŚŝƚĐŽƌƉŽƌĂƚĞƉƌŽĮƚƐ͘
dŚĂƚŝŶƚƵƌŶǁŽƵůĚůĞĂǀĞǀĂůƵĂƟŽŶƐůŽŽŬŝŶŐƚŽŽ
ƌŝĐŚ͕ďĂƐĞĚůĂƌŐĞůLJĂƐƚŚĞLJĂƌĞŽŶƚŚĞĂƐƐƵŵƉƟŽŶ
ƚŚĂƚƌĞĐŽƌĚĐŽƌƉŽƌĂƚĞƉƌŽĮƚŵĂƌŐŝŶƐǁŝůůƐƚĂLJ
ŚŝŐŚŽƌŐŽŚŝŐŚĞƌ͕ĂŶĚĂůƐŽƉŽƚĞŶƟĂůůLJĞdžƉŽƐĞ
dividends to cuts as companies see their earnings

ĂŶĚĐĂƐŚŇŽǁƐƐƚĂƌƚƚŽĚŝŵŝŶŝƐŚ͘

And this is where Mr. Spreadbury’s second

chart comes in. It shows the US 10-year Treasury

yield minus the Fed Funds rate.

On the three occasions when the Fed’s target

rate has exceeded the 10-year Treasury yield

since 1990, a US recession quickly followed, in

1990-91, 2001-02 and 2007-08.

This indicator also proved accurate with the

double-dip downturn of 1979-1982 but the chart

below does not go back that far.

dŚŝƐŝƐŶŽƚĂƉƌĞĚŝĐƟŽŶĨŽƌϮϬϭΘĂŶĚƚŚĞ

good news is that the US 10-year yield of

ϯ͘ϭϭйƐƟůůĐŽŵĨŽƌƚĂďůLJĞdžĐĞĞĚƐƚŚĞϭ͘ϳρй&ĞĚ

target rate.

ƵƚŝĨƚŚĞ&ĞĚƐƟĐŬƐƚŽŝƚƐƐĐƌŝƉƚǁŝƚŚ

two or three more increases this year then

investors need to keep a very close eye on

b o t h t h e F e d a n d t h e U S b o n d m a r k e t a s

the year develops.

TECH STOCKS ARE TRYING TO RECOVER THEIR

POISE AND EMERGING MARKET CURRENCIES

ARE COMING UNDER THE COSH

IF THE FED’S TARGET POLICY RATE EXCEEDS

d,ϭϬͳzZdZ^hZzz/>d,E,/^dKZz

SUGGESTS THE US ECONOMY COULD STUMBLE

Source: Thomson Reuters Datastream

Source: Thomson Reuters Datastream

By Russ Mould, investment

director, AJ Bell

WHY IS THIS COLUMN

CALLED AEQUITAS?

/ƚŝƐƚŚĞ>ĂƟŶǁŽƌĚ

for equity and the

origin of the modern

word in both senses –

fairness and the value

of a company’s shares.