Out with Keynes, in with Hoover?


At the end of each month, BBC World News business presenter Jamie Robertson looks at the world's major stock markets. This month he considers the eurozone's struggle with low growth.

Image caption,
Is Europe reviving the policies that took the US into the Great Depression?

Quite a month: Greece, and the rest of the eurozone, gets a $1tn rescue package, the euro hits four-year lows, BP has a third of its market value wiped out by the worst oil spill in US history, and the world's biggest stock markets lose all their gains since the beginning of the year.

There was also the worry over the 40% supertax on mining companies by the Australian government.

And there were rumours, hotly denied, that China was going cool on European debt, all interspersed with a smattering of poor figures on the US economy.

The rally from the spring last year needed some of the wind taken out of its sails, and May did just that. The question that has investors scratching their heads is whether the correction is over or still under way.

The biggest negative is the growth outlook in the eurozone. As the Nobel prize-winning economist Joseph Stiglitz has pointed out, the European economies seem to be embracing the policies of Herbert Hoover.

He was the US president who carefully guided the American economy into the Great Depression after the Wall Street Crash, by worrying over-much about the deficit.

Cutting deficits at a time when the European economy is struggling out from under the dead weight of near-zero growth will, he believes, condemn economies such as Greece, Portugal and Spain to years of grinding poverty.

The brief rekindling of the love affair with Keynes appears to be over.

Corporate health

Northern Europeans need not be too glum - so long as they are not disturbed by the news of protests, riots and armies of unemployed among their southern neighbours.

The impoverished south should keep the euro weak, and the northern exporters should benefit accordingly.

Last week, the OECD predicted that Germany's economy would grow 2.1% in 2011. It was predicting 1.9% back in March. French GDP is forecast at the same level.

Justin Urquhart Stewart of Seven Investment Management said: "It's not that the euro is particularly weak. It's back where it was several years ago, after a period when the dollar was abnormally weak.

"But the falling value of the euro is doing wonderful things for all those rather boring and very efficient exporting German companies."

Indeed, all round the world, corporate numbers are coming through strong and healthy.

Work by Mirabaud Securities, part of the Swiss Mirabaud banking group, shows that the number of upward revisions on corporate earnings by analysts, calculated by what it calls its earnings momentum indicator, has reached the highest level since 1989, when they started collecting the data.

Now this isn't necessary a presage of disaster or bonanza. Its significance is not so much in the direction of the market as the character of the market.

Mirabaud says that when studying these changes in analysts' expectations, a shift in "market leadership from cyclical, high earnings-volatility stocks towards 'defensive', low earnings-volatility 'quality' stocks was a recurring leitmotif".

Keep it simple

In effect, the mood has changed. More prosaically, Mr Urquhart Stewart says: "After all these good numbers, you start asking - where do we go from here?"

Stefano Mazzola, economist at Mirabaud Securities, says: "In times of government crises, sovereign debt disasters, when many see gold as the only holder of value, it's best to stick to simple things you understand, where earnings have low volatility and there's a strong dividend."

Once upon a time, that could have meant buying BP, the cash generator par excellence. No longer.

In fact, with a proposed Australian 40% supertax on mining companies, the attractions of resource companies look somewhat tainted.

BP has to face a clean-up operation, possibly far higher drilling costs in the US, the threat of criminal litigation and civil law suits.

This is a tall order, but we are close to the point where the worst-case scenario is almost written into the price, and already many brave/foolhardy (delete as applicable) investors are talking about it being a bargain.

But there are bigger issues to be aware of. Many of them relate to the so-called "exit strategies" that countries need to devise for their stimulus packages.

"Fiscal discipline" or "deficit-cutting" imply roughly the same thing, and roughly the same amount of pain.

Europe has started to grasp this nettle, possibly over-zealously and too early, but the US and China have yet to do so.

Mr Urquhart Stewart believes this could start to happen as early as the second half of the year, and doubts that the UK's FTSE will rise much above 5,600 before pulling back.

So although the May correction could well be over, there could be several more just like it in the months ahead.

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