Trouble with booms: Markets give a cool reception to IMF's optimism

Published: September 22 2000 20:04GMT | Last Updated: September 24 2000 17:22GMT

Today's sophisticated techniques of economic management have eliminated boom and bust. At any rate, that is what the politicians like to tell us, although many of us are reluctant to believe them. So the leading stock markets responded negatively to this week's upgrading of the IMF's global economic forecast.

Since it last pronounced in May, the IMF has raised its projection for global GDP growth in 2000 from 4.2 to 4.7 per cent, the best since 1988, and is expecting a still very robust 4.2 per cent growth rate for 2001. But the markets shivered at what this boom might do to the price of oil, and the handful of wise veterans who can still remember the surge of expansion in the late 1980s exchanged tales of how by 1991 the global growth rate had tumbled to less than 2 per cent.

That unstable 1988 upsurge, some of us recall, was partly attributable to the monetary looseness implemented by central banks to counter the impact of the 1987 stock market crash. The crash damage turned out to be an illusion, however. Coming up to date, the strength of the 2000 boom may be linked to the liquidity pumped into the global economy last year to beat the menace of the millennium computer bug. That turned out to be a false alarm, too. But history does not repeat itself, does it?

It will not do so exactly, certainly. A dozen years later there is a new twist to the boom. From the point of view of stock market investors a great battle is under way between the old and new economies. This was partly resolved last winter when the Nasdaq market crashed in the US, but there continue to be strong and unresolved rotations between the TMT and legacy sectors.

Viewed simplistically, there has been a battle between the two major investment styles, value and growth. Value managed a comeback in the second quarter but it has often struggled during the past few months. In theory, strong economic growth should help the struggling old economy stocks which value investors like to buy, whereas each time sentiment switches back towards expectations of a hard economic landing there is a positive impact on the prices of growth stocks.

The oil price leap has damaged the value sectors, however, because manufacturing (and distribution) companies are threatened with higher costs which many of them will not be able to pass on. In the UK this week ICI, once the bellwether of British industry, but today just a symbolic legacy company, suffered a share price fall to the lowest level for ten years. Value-seeking investors might be tempted by its 8.5 per cent notional dividend yield; but that statistic only serves as a warning of the vulnerability of the payout.

Elsewhere, Smiths Industries suffered a share price drubbing when it announced a takeover bid for the metalbashers TI Group. And automotive components makers around the world have issued profits warnings after coming under intense pressure to cut prices. Meanwhile the Confederation of British Industry's survey showed that UK manufacturers are expecting their selling prices to fall in many more cases than they can be raised. Corus, the former British Steel, has also been hitting new lows.

Traditional raw materials (other than oil) are declining in importance, and producers of manufactured goods in Europe and the US are subject to global competition from countries where profits are not regarded as being very important. These are tough times for makers of commodity products. Protected franchises are required to turn companies into attractive propositions for mainstream investors.

There can be no confidence that troubled traditional companies will ever bounce back, even when aided by a strong economic cycle. They may wither away like the old British textiles giant Coats Patons, now called Coats Viyella, which having sunk to 394th among British listed companies by market value was this week relegated unceremoniously to the FTSE SmallCap Index. They may disappear like United Biscuits into the shadowy world of private equity, to be churned and reinvented.

But despite these disappointments from old favourites, investors are not retreating from the stock market as a whole: they are instead redeploying their wealth into the newer sectors. I was interested to see a chart from the US pension consultants Frank Russell tracking the importance of technology stocks in the US equity market over the past 20 years. For many years the tech sector represented between 10 and 15 per cent of the Russell 1000 Index but over the past two years the proportion has climbed rapidly to 30 per cent. Indeed, if you look at the Russell 1000 Growth Index, which leaves out the value stocks, the technology representation is more than 50 per cent.

All the same, it has been a rotten September so far for the leading stock markets. In the US the S&P 500 has eased 6 per cent, and the more fashionable and techy Nasdaq index is down by 12 per cent. In the UK the FTSE 100 Index seemed to be emerging from the doldrums in late August, but it proved to be a false holiday season breakout: this month the Footsie has fallen by 9 per cent taking it towards the bottom of the year's very narrow trading range.

There are various possible explanations. The oil scare has fuelled inflationary fears and caused stock market analysts to worry about the extravagant rates of earnings per share growth they have projected for many companies; bond yields have risen; and global liquidity growth has been very weak. Moreover the plight of the beleaguered euro may be symptomatic of a broader malaise in the global economy; indeed, the IMF's top economist Michael Mussa said on Tuesday that the weakness of the euro threatens to become not just embarrassing but potentially destabilising. On cue, the major global central banks piled in to support the euro; but they must not be too enthusiastic because they might go so far as to undermine the US dollar and create further problems for Wall Street which has prospered on currency inflows.

The shortage of genuine value may be an important factor underlying the stock market's persistent lack of enthusiasm, however. ICI's 8.5 per cent dividend yield offers no comfort, but then neither does the 0.6 per cent yield of Vodafone or the zero yield of Colt Telecom or Bookham Technology. There is no cushion, just in case one of those half-remembered recessions happens to come along.

http://markets.ft.com/ft/gx.cgi/ftc?pagename=View&c=Article&cid=FT3AZN66GDC&live=true&tagid=ZZZ8P2KD20C&subheading=global%20markets

-- Carl Jenkins (Somewherepress@aol.com), September 26, 2000