What is happening in equity markets?

Markets are odd creatures; since August it has been apparent that the threat of rampaging Jihadists in the Middle East in the form of Isis or IS was a very real one. Yet on the whole markets have been indifferent and the oil price has been on a downward trajectory. Yet, with the US and allies launching air strikes on Isis strongholds in Syria for the first time, yesterday (23.09.14) markets took fright, with the FTSE 100 suffering its worst day since March.

Whilst one can understand a natural aversion to the images of war and the heightened sense of anxiety, the market’s reaction is surely somewhat perverse; whilst obviously the situation in Syria is fraught (is our enemy’s enemy (Assad) now, at least temporarily, our friend?), attacking the Isis bases in Syria, if not sufficient (that would require ground troops) is at least a necessary condition for defeating this all too frightening horde. Further, is it not positive that the US, instead of acting alone, has managed to bring in five Arab nations as part of a coalition. And, as far as I can tell, neither the Iranians nor the Syrian government itself have raised much in the way of objection.equity-markets

So why the market sell off? It is true that the FTSE 100 at 6678 is only down about 3% from its summer peak, but it might have been expected that, having got through the travails of the Scottish referendum, markets would have been heading in the opposite direction. Are there other factors at work? There have been some stock specific factors, of course; the US move to crack down on conglomerates escaping the tax net affected some of the bid targets, notably AstraZeneca. Tesco has had its high profile embarrassment, by overstating its expected profit outcome by an extraordinary £250m. This certainly wasn’t in the script! Tate & Lyle yesterday issued a profits warning; beware the third warning, as older market participants used to say.

Reviewing the economic news over the summer not that much seems to have changed. The ebbs and flows of the Euro area continue to trouble, but there is always (super) Mario (Draghi) to come to the rescue, provided the Germans will let him. There has been some angst about the state of Chinese growth, but the most recent survey of manufacturing seems to have been mildly positive. The point has been made before, that although growth may be slowing, the Chinese economy has reached a size when it can still contribute significantly to world demand, even at a lower percentage growth.

It is true that US jobs growth in August disappointed with only 142,000 jobs added against expectations of well over 200,000 but the cumulative number is still quite impressive. In the UK perhaps the housing sector is slowing down, but this is probably no bad thing (at least from the Bank of England’s perspective.)

There remains the question of when interest rates will rise, but this is hardly a new issue. Ten year government bond yields both in the US and the UK remain low at around 2.5%. So, is this sell off partly a seasonal effect as fund managers return from their holidays and seek to lock in some of their past gains? It is true that the US market has been hitting all time highs so some correction is probably a good thing. Will it go further? Very possibly, although calling the market over the short term is unwise. The UK market (FTSE 100) is yielding 3.5% historic; this still looks relatively attractive to us as longer term investors.