Active investment commentary & analysis

How can investors put summer worries into context?

Even the most disciplined investors struggle to manage their attention. Distraction comes from summer headlines that are dominated by politics, currency and weather. It is hard to concentrate on business performance and valuations, particularly in a vacuum of company reporting. Behavioural finance tells us that attention-grabbing information can drive bad, hasty decisions. How can investors put summer worries into context?

Thin trading in August magnifies the unimportant. Selling may be tempting, but few investors get market timing right. Stockpickers should focus on the information they get from companies themselves. The leading indicators that actually matter get few column inches. Falling bond yields, bank shares and commodity prices can give useful signals, but get little attention. And, prospects for individual companies in a portfolio may differ from global trends. Investors should recognise the role that extraordinary monetary policy plays in disconnecting the real economy from the performance of financial assets. Genuine growth is scarce.

Certainly, bonds and commodities seem to be pointing to slower global growth, with parts of Europe in negative territory. But there is little sign that inflation is breaking out, and that leaves bond yields as a key factor in equity valuation. If anything can be learned from front page politics, it is that politicians want to spend, and are directing central banks to help. Despite the slowing of the global economy, falling bond yields could drive higher equity valuations. The premium that investors pay for consistent growth businesses could expand as uncertainty grows. That has been the surprise of the first seven months of 2019 - the headlines may only be telling us that there are nervous investors, and money on the sidelines.