Even for this resilient bull market, the threats are starting to multiply
So much for the idea that bull markets in shares die of old age. This theory has been widely touted for at least the past four years and, 12 months ago, it seemed as if the naysayers were on to something. Global share prices, as measured by the broad MSCI World index, fell 3% in 2018, with much of the blame pinned on the brewing China-US trade war. But then came 2019: a surge of 24% in the same index.
Life doesn’t seem quite as nice if you gaze solely at the FTSE 100 index – a fall of 12.5% in 2018 and a rebound of 12% in 2019. Still, last year was the best performance in three years for the London market’s blue chip index. Death by old age did not occur.
Can the run continue? Predicting major turns in stock markets is a mug’s game and you would be hard-pressed to find a single forecaster with a convincing record over the necessary span of a few decades. There are too many factors at play. We can, though, perhaps say this about the outlook for 2020: if you’re hunting for events that could derail a bull market, the current list is long.
Indeed, it became significantly longer at the end of last week with the killing by US drone of the powerful Iranian general Qassem Suleimani. The oil market – which clearly contains the potential to upset global growth – reacted by pushing up the price of crude by more than 3%, but that modest reaction may be a useless guide if a new chapter in Middle East instability has begun.
A change in the interest-rate weather is the most common cause of a turn in stock markets
If retaliation by Iran took the form of strikes on Saudi Arabian oil facilities or tankers passing through the strait of Hormuz – a critical route for a fifth of the world’s oil supply – it is safe to assume the price of a barrel of crude would go substantially higher.
Then there is the US-China trade quarrel, investors’ obsession for the past 18 months. The buoyancy in stock markets in the past year has flowed largely from a reappraisal of events: instead of fretting about a breakdown in relations, the market switched to applauding President Trump’s promised arrival of a “phase one” trade deal. Since Trump has a re-election campaign to fight this year, goes the reasoning, he won’t want to risk sending stock prices lower by disappointing investors with the fine details.
That theory, though, feels a little too comfortable. A lot of faith has been invested in the idea that a successful first phase makes a wider deal, and the removal of all major tariffs, inevitable. Things are rarely so straightforward with Trump.
Closer to home, one could make a similar point about the UK’s post-Brexit trade negotiation with the EU. UK manufacturers, in particular, still have every reason to fear that their supply chains could be seriously disrupted. Trade negotiations can have messy conclusions.
Behind all those factors sits the knowledge that a change in the interest-rate weather is the most common cause of a turn in stock markets. Back in 2018, investors worried about the Federal Reserve’s plans to tighten policy and then, in 2019, were cheered by the Fed backing off. That soft-shoe shuffle, though, can’t disguise the fact that central banks’ ability to fight any recession with cheaper money is limited. Coffers are depleted all around the world, even if China opened the year by pumping money into its financial system.
Bull markets, as the old saying goes, climb the wall of worry. It is perfectly possible they will continue to do so in 2020: to repeat, age is not the barrier. But it looks a brave bet given the risks from so many directions. After a 24% gain in 2019, merely going sideways would count as a decent result.
Mayors must get a say in future of Northern rail franchise
The transport secretary, Grant Shapps, started 2020 by telling passengers to expect “a year of action towards creating a rail industry relentlessly focused on improving their experience”. His first offering, though, was more a piece of non-action.
Northern rail could be stripped of its franchise and replaced by a state-owned “operator of last resort”; but, then again, the current operator, Arriva, could be handed a new contract with revised terms. Shapps hasn’t made up his mind yet.
What he really meant by “year of action” was that the government will publish a white paper this year with proposals to reform the running of the railways. That, at least, is something to cheer. Customer satisfaction is the lowest it has been for a decade, especially among commuters – and on Northern’s patch the mood could be called furious. Almost everyone agrees reform is needed.
What form should it take? Keith Williams, former chief executive of BA, will publish his government-commissioned review in the coming weeks and the broad outline seems clear: less day-to-day control by the Department for Transport; a new national body to coordinate the system; and an end to the franchising system in its current form, though still with private sector participation.
The deeply unclear part, though, is how much local control to grant. In the case of Northern, the answer should be: as much as possible. It’s what the mayors of Manchester and Liverpool want and, given that London already has greater control via Transport for London, their request should be granted.
Arriva, it should be said, is not a caricature villain with its Northern franchise; some faults are beyond its control, such as delays caused by Network Rail, the state-controlled owner and operator of Britain’s rail infrastructure. But the point remains: if you really want a system that responds actively to customers, take more decisions locally.
Regulation could lengthen odds on bright future for bookies
With a potentially pivotal year ahead for the UK gambling industry, battle lines are already being drawn. High street bookmakers lost their fight against tighter restrictions on fixed-odds betting terminals (FOBTs) last year as the government bowed to pressure and slashed the maximum permitted stake from £100 to £2. The industry fought hard against any curbs at all but this draconian restriction means a dependable cash cow was brutally sacrificed.
Now, campaigners are preparing to open a new front, this time on online gambling. In a report late last year, a group of MPs who were instrumental in the FOBT campaign asked why the same restriction – a maximum £2 stake – should not also apply to online slot machines. When the stock market opened the following day, investors, detecting the rumble of approaching regulation, ditched gambling shares to the tune of £1bn.
Then, last week, the Guardian revealed that regulator the Gambling Commission was considering a ban on “VIP” schemes. These programmes single out customers who lose large sums and offer them loyalty rewards – cashback on losing bets, free bonus “spins”, even football or boxing tickets.
According to data compiled by the Commission, one operator derives 83% of its account deposits from VIPs, even though they make up only 2% of accounts.
If these schemes go the way of FOBTs, it could deal a serious blow to online gambling revenues. Factor in other possible changes, such as a ban on credit card betting or tighter affordability checks, and the immediate future looks potentially bleak for bookies.
The industry, via a newly formed trade body called the Betting & Gaming Council, is reportedly ready to come out swinging, defending itself more effectively than it did over FOBTs.
But recent history shows that the house doesn’t always win any more.