In the last month the prices of aluminium, zinc, and nickel, to name but three, have risen by 10%-15%. Copper, the bellwether of the metals sector, is up 27%. The price of oil, as you no doubt notice when you fill up the car, has moved from $42 per barrel to $50 per barrel.
Back here in the UK the share price of property leader Land Securities is up 52% in a month, leading house builder Persimmon is up 23%, and even the wretched Royal Bank of Scotland has seen a 57% move, from 19p to 30p. What is going on?
It all comes down to ‘risk appetite’. It’s one of those horrible terms like ‘wealth management’ and ‘high net worth’ coined by City whiz-kids to make it appear that they know a whole lot more than you or I. Perhaps you already know what it means. But in case you don’t, I would explain it as follows…
The blood of adventure is stirring
If you are nervous about the economic outlook you stick your money under the mattress. You have no ‘appetite for risk’. But if you think that things look a little rosier and your blood is stirred by the thought of quick trades and easy profits, then you plunge into Vietnamese property funds, frontier oil projects or whatever else allures your ‘appetite for risk’.
You get the picture. So what is clear from the prices that I have illustrated above – and I could give you many other examples – is that the blood of adventure is indeed stirring. To prove the point the price of gold – the ultimate haven of those who mistrust the entire financial world and all that it has to offer – has slipped back from $910 per oz to $885. It is clear that the mood of the market has changed. Why?
There are three answers to that question. The first is that financial markets react to changes on the margin of expectation. In other words if the prevailing view alters from the belief that the world is going to end tomorrow to one that gives it another month or so, then markets will rise. Today we still feel gloomy about the economy – but not quite as suicidal as we did.
The next reason why some prices, especially of commodities, are rising is the inventory cycle. Consumer confidence hit its low point last October. Retailers slashed orders, their suppliers in turn cancelled contracts with their own raw material providers. Levels of inventory were cut to the bare minimum throughout the supply chain and manufacturing industry shuddered to a halt.
But that cannot last. Even if adjusting to a lower level of sales, retailers and manufacturers must maintain some inventory, so there must be some production of goods and some rebuilding of stocks. The inventory chain has duly been replenished in the first quarter.
Signs of a recovery that will feed off each other
And then there is a third factor – the actions of our political leaders may actually be working. As one leading fund manager pointed out last year ‘the scale of the problems is unprecedented – but so is the policy response.’ Interest rates have been slashed, governments have given up any pretence of balancing budgets and now this mighty effort to float the sinking ship may be working.
The bears, of course, are in denial. Each piece of positive economic data is dismissed as a blip. ‘One swallow does not make a summer,’ they warn. But like it or not there are now signs of a recovery, and they will feed off each other. If we manage finally to sell our house we might celebrate with a meal at our hard pressed local restaurant.
Let us not make the mistake of dismissing the evidence just because it does not suit our view. The green shoots are appearing and I expect to see further evidence of economic recovery in the coming weeks. So ask yourself – does it really make sense to hoard your cash at this time? Does it really make sense to accept a derisory return on your bank deposit account when the UK stock market yields over 5%?
It is time to sharpen up your appetite – your appetite for risk. It is time to be brave. It is time to hunt for bargains in the stock market. Where I am looking, in the downtrodden small company sector, there are plenty of incredible bargains to be had. If you have the guts to get into the market now, I’m certain you’ll be richly rewarded.
Good investing,
Tom Bulford
For The Penny Sleuth P.S. The stock market is now creeping up and is higher than it was six months ago. And small companies are beginning to outperform large companies. This is the time to start buying good quality small company shares. I can help you invest in the right companies now.
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