Wednesday, the day after Barack Obama’s victory, the world’s stock markets fell. This should not be taken as an informed investor reaction to the election of a new American president. Indeed yesterday the indexes began to recover. In truth the only thing that is informing the markets at the present is barely controlled panic, from which a few astute investors are making fortunes by cashing in on the extraordinary daily volatilities. What is lacking is confidence and we can’t expect Obama’s election to fill the void because there are still two months for him to take over. The new president’s campaign mantra of change clearly appealed to voters but right now it has little to offer the investment community. They are looking at sharply shrunken portfolio values and no clear opportunity to earn the double-digit returns to which they became accustomed in the long financial and economic boom.
In this respect, it is worth analyzing the nature of the confidence that is currently so spectacularly missing. Companies and those who invested in them are used to stellar year-on-year growth. Even businesses in traditionally slow growth areas such as power and water utilities, drove their balance sheets hard through mergers and acquisitions, by outsourcing back office services such as accounts and customer services and by rationalizations, all designed to slash costs. Even before the credit crunch, it was becoming increasingly hard to generate the high returns the markets had come to expect. Profit growth of, for instance, five percent was regarded as failure and chief executives paid with their jobs. Yet there was a time when in mature industries, such returns if sustained year after year were considered acceptable. The high-earning glamour stocks have always been in new technology enterprises, starting with canals, then railways through more recently to information technology and now the Internet.
There was a time when investors would have held a spread of solid, low-yield equities and indeed government bonds, together with a smaller proportion of higher-earning shares. It was always understood that the higher the reward, the greater the risk.
Such prudential investment strategies have been abandoned. Promised the greatest returns, investors plowed into tempting pseudo-investments conjured up by investment bankers whose collapse triggered the current financial meltdown. The extent of the confidence crisis now gripping investors is demonstrated by the relative lack of a so-called “flight to quality”, to companies with reliable, if unspectacular, core earnings, which ought to be seeing their share prices strengthening in generally falling markets. But this is not happening because investor confidence is still predicated on substantial returns and they cannot find them.
Until the greed for ever-greater profits — however achieved — is abandoned, market confidence will continue to stumble. Before it can be rebuilt, the whole question of how value is generated and sustained must be reassessed, both by investors and the companies whose drive for constantly spectacular growth has been exposed as unrealistic.
