The FT has reported this morning that:
Sales of active equity funds sold in the UK dropped by more than 90 per cent last month after the coronavirus outbreak in China led to a sharp deterioration in investor confidence.
Actively managed equity funds registered inflows of just £78m in January, down 93 per cent on the previous month, according to Calastone, the global funds transaction network.
They added:
Sales of index-tracking equity funds were less severely affected with inflows dropping by about half last month.
I think most readers know that I am deeply cynical about stock markets. The supposed growth in value that they appear to deliver, to which the media gives much over-excited attention, is nothing more than the inevitable consequence of the steady inflow of funds on a regular and recurring basis from the likes of pension funds and others chasing a fixed or even declining pool of assets (which is what the market authorities engineer to be available) meaning that, absolutely inevitably, markets usually rise as an excess of money tries to buy shares that are in limited supply. Every now and again the equally inevitable consequence is that there has to be a crash when it is appreciated that shares have become entirely disconnected from any real value that they can deliver.
What causes that appreciation of over-value can vary, of course. That's why knowing when it might happen is not a science. The anticipation of widespread realisation of the truth that has been veiled by deliberate deceit of a co-ordinated market that gains from that opacity is always going to be guesswork.
There are though certain indicators that can suggest that the chance of that appreciation is more likely than not. One of those indicators is a sharp fall of the inflow of funds into the market. At the very least that means that demand for shares falls. And so does the price in that case. That can happen for a short period with little consequence. But if it is protracted - and that can mean weeks, and not months given the dependence of the financial markets on the regular inflow of funds to keep the voracious appetite for returns for the City satisfied - then the risk of a downturn grows, very rapidly as liquidity in the market declines.
We may not be quite there yet. It's hard to tell, as I have already noted. But novel coronavirus does not seem to be going away, and nor has it even been contained. The impacts of it are not really being felt in many commercial markets as yet, but it looks likely that they will be. And the stock markets have already noticed. If the mood changes - and it could, very easily - the chance that this will signal a major change in sentiment are high.
Those who did not send their funds to the stock market last month thought there were safer savings media in the world. They may well be right.
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“is nothing more than the inevitable consequence of the steady inflow of funds on a regular and recurring basis from the likes of pension funds and others chasing a fixed or even declining pool of assets (which is what the market authorities engineer to be available) meaning that, absolutely inevitably, markets usually rise as an excess of money tries to buy shares that are in limited supply”….You describe perfectly the Government bond Market!!
Stockmarket’s are meant to be risky. They represent the discount value of the collective of company forecast earnings going into the distant future. How distant?, well along way into the future, look at the performance of Tesla in relation to its current profits. So with this enormous uncertainty share prices have are going to be volatile. Still the FTSE yields 4% and earnings can grow with inflation. If you want no risk then its cash (except it isn’t risk free free because inflation erodes value) or hold Gilts or Treasuries (except these are far far from risk free, aforementioned inflation risk doubled up with modified duration – surely one of the real hidden darkest risks in financial markets?).
So volatility is part and parcel of investing and the longer an investors time frame the more risk they can endure. Just to be clear with negative real rates of interest there are no safe havens for money at the moment. The bond markets only offer interest rates in excess of inflation if you go down the credit curve and quite far out.
So yes i agree equity markets are risky but so are cash and bond markets for different reasons, And yes aside from the misery of illness and death the coronavirus is a massive worry for everyone economically as it will inevitably cause an economic slow down indeed that is happening already..i also expect share prices to fall but what do i know?
If you think shares are valued on the basis of DCF you’re a fool
There’s no other way to describe such a nonsensical claim
I never mentioned discounted cash flow and why throw insults?
I am saying analysts try to look at earnings and eventually profit a long way into the future. With the many variables and uncertainty at play stockmarket volatility is absolutely expected. It is not unusual. That is my point. I was also saying that no cash or bond investor can escape risk with negative real rates of interest. I actually think Government bonds are a time bomb because investors think they are holding safe assets when they are not. This is particularly so with long dated Gilts/Treasuries.
So we are surrounded by risk and there are absolutely no safe havens. TIPs look quite cheap though
You did mention discounted earnings….
With respect, you really are talking nonsense
I think cash might suit you well
Yes i did mention discounted earnings..which is not the same as discounted cash flow in an accounting sense!!!!
The word “discount” is there to ascertain all the things that will impact on earnings in the future and bring back to a value to pay for the Shares today. A very challenging task hence the volatile nature of equities. Also as challenging as having a sensible discussion with you on a subject you clearly know little about..other than it would seem long held prejudice which is ignited from time to time on soundbites you read in the paper
I’m sorry….but you really are talking nonsense
Martin Gilbert says:
“Stockmarket’s (sic) are meant to be risky. They represent the discount value of the collective of company forecast earnings going into the distant future.”
You’re a hoot Martin. Made me smile, anyway. 🙂
And as is now clear, he does not understand what that means
Anyone who knows an industry sector well and also knows some of the so called ‘analysts’ will know that most of them are quite startlingly ignorant of the sectors and companies in which they put their clients‘ funds. They also know that the City is very short term – no surprise there. With the odd exception to both statements.
The idea that stock values are based on long term views of earnings is a hilarious conceit. Or just plain bollocks.
I go with the bollocks
Not everyone agrees that Bitcoin is a ‘safer savings medium'(!), but it seems to be attracting money again. The more conservative scaredy cats are buying gold as ever.
Anything to hide the loot rather than invest it. But if your other post is to be taken seriously, and all indications so far suggest it should be, the ‘Fuck business’ ideology of Johnson and Javid makes real investment in productive business, anything requiring actual customers, look something akin to madness.
Enthusiasm for negative yielding government bonds are probably a fair indication of considered market expectations for the medium term. Neoliberal pleading for ‘small government’ is after all, only a slogan.
Or high net worth individuals in the UK paid their self assessment tax in January instead?
(Sorry I have no idea of the relative amounts of those two things, but wonder if it is a factor)
Possible
But simply not the trend
Chinese New Year means that everything stops in China for at least two weeks, plus the disruption of ramping down production beforehand and ramping back up afterwards.
Western companies depending on Chinese suppliers have to buy in extra supplies of parts and materials to tide them over while those suppliers are shut down for the holiday.
With the coronavirus epidemic so far happening during a period when Western companies have to hold extra stock of Chinese parts and materials anyway, I find myself wondering whether the markets are coasting on the fact that many companies are still sustaining their operations using the extra stock.
I’ll be interested to see what happens when the extra stock runs out and supplies of replacement parts and material fail to arrive from China.
I fear that I am one of Richard’s idiots.
I try to ignore labels and simply classify investments into two groups – “Income Stream” and “Greater Fool”. Agreed, all investments carry risk. Income Stream investments include cash, bonds and some equities. You pay a sum of money for a stream of future income. As long as the income persists, the investment has some value. Greater Fool investments include gold bars, bitcoins, derivatives, and other equities including “the next Amazon”. You buy a product, hoping that someone else will buy it from you at a higher price. You could end up with a fortune or nothing. Too clever for me.
The market has been so distorted over recent years, that even with pessimistic assumptions, I think that some equities still offer a better value income stream than bonds or cash.
First Rule: Beware labels
Second Rule: Labels add bias to the market. Look for other small biases.
Third Rule: If you use biases to make small bets at slightly favourable odds, you should always come out ahead. Too many large bets, you will always end up broke.