When business and investor confidence is low companies do not invest – they
cutback and batten down the hatches.
Professional investors rarely sell in such circumstances because they do not
want to look stupid if the market rebounds unexpectedly leaving them sidelined.
But they do tend to hoard new cash coming in rather than using it to buy new
shares and they tend to pressure boards to use surplus cash for share buy-backs
or higher dividends, rather than strategies for growth. There is quite a lot of
this thinking about at the moment.
According to a Merrill Lynch monthly survey almost 60% of those polled now
expect things to be worse rather than better in the next 12 months.
So confidence is a good thing in that it keeps everything trending upwards.
The trouble comes when it becomes misplaced, for example, 10 years ago when the
then US Federal Reserve chairman, Alan Greenspan, famously accused investors of
‘irrational exuberance’. It is misplaced again now, according to the Bank of
England, but this time the irrational exuberance is seen in the way investors
across the globe have forgotten how to distinguish between quality and rubbish
in the investments they buy. These days investors assume everything is equally
Ironically, the longer things are safe the more dangerous it becomes because
investors price assets using risk models based on what markets did in the past.
The longer things are quiet the more those models predict that they will
continue to be quiet and deliver the message that it is safe to carry on buying.
Blind faith in computers is leading them over a cliff.
Anthony Hilton is finance editor of the Evening Standard
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