It was Mark Twain, in Pudd’nhead Wilson, who originally suggested that October is a dangerous month to speculate in stocks. He, of course, went on to suggest that every month of the year is ‘peculiarly dangerous’, in effect. This October seems to follow the phenomenon: there is a rather nervous feel to European markets, but almost solely due to political uncertainty rather than the imminent results season.
Politics has loomed its head across markets, with Italy in particular hit by concerns over recent attempts by the despicable Mr Berlusconi to avoid imprisonment. In the Netherlands, politics is an increasingly volatile game, while in Austria the populist ‘Team Stronach’ party, which campaigned on a mandate to split the euro by national borders, has won seats in parliament. In France, President Hollande continues to plumb new depths of unpopularity, and in the UK politics remains a threat to stability. Even Germany’s Chancellor Merkel is being forced to compromise with the left-leaning SPD in order to form a coalition, despite a very strong showing for her party in the recent elections.
Just in case all this is not enough to make markets nervous, party-political infighting over where to apply spending cuts has forced the US government to shut up shop for an indeterminate period.
If this all sounds familiar; it should. It was the same last year.
The result this time around is a sharp increase in short-term uncertainty, which throws a cloud over recent economic data and companies’ statements, which indicate that conditions are improving. Suddenly, the obvious inflow of funds to European markets could be checked by concerns that we might be close to launching into another Euro crisis.
My view is that the next few months may be tense, but the benefits of taking tough decisions on austerity are beginning to show. The only party in Germany that wants to exit the Euro, the AfD, failed to reach the 5% threshold needed to enter the Bundestag, and generally there is optimism that the eurozone has already passed through the worst. That some parts of the electorate want to return to previous failed policies seems a contradiction, given that economies in the region look to have finally turned the corner.
Part of the market thrives on uncertainty and changes of direction provide renewed opportunities to trade on conflicting investor sentiment, at least for a while. Certainly, after the strong share price gains we have seen so far in 2013, a period of consolidation is both healthy and quite likely. There is also evidence that a significant part of the funds flowing to European Equities has been by way of the ETF market, which has been shown to be a flaky, somewhat artificial means of ‘investing’. These investor flows might just as quickly run in the opposite direction, reversing a trend that has been in place for several months.
So prepare for a nervous few months and watch developments carefully. It may be difficult to filter out reality from the noise. My suspicion is that Italy will have a working coalition in the not too-distant future, which will get to grips with some of the many pressing issues that need addressing. Germany is likely to see a Merkel-led coalition, which will continue to press on with measures to reform and reflate the German economy, while also preparing for more debt write-downs in some of the peripheral countries of Europe. In the UK, we may still be wrestling over whether or not we want to be part of Europe, or part of some fantasy world.
In the meantime, the US government might reopen for business, after settling on a compromise agreement that allows difficult decisions to be postponed another year.
In this period, I recommend that investors look at where quality companies are trading and what returns they may be able to offer to patient investors over the next few years.
Opinion column by Tim Stevenson, Head of Equropean Equity at Henderson Global Investors
