For much of 2017 and the beginning of 2018, various commentators pointed to a Goldilocks economy, one that is not too hot nor not too cold. It has been characterised by synchronised economic growth around the world, with muted inflation and supportive central bank policy. It was also a period of rising stock markets and unprecedented low volatility. It proved to be the calm before the storm. Since January we had a sell-off from bonds and equities on fears of US wage inflation and rising interest rates, followed this week by breaking news of a looming trade war between the US and China. Volatility and the so called fear index has spiked and equity markets tumbled again. All this has taken place in a backdrop of a sea change of policy by central banks to gradually turn off the supply of easy money, the reduction and reversal of QE.
Another concern highlighted again this week has been with UK retailers with major names announcing profits warnings, cut backs and restructuring. The list of firms in trouble in the last few months has been growing. Toys R Us went into administration a few weeks ago whilst Next announced a fall in profits on the back of the most challenging trading conditions for 25 years. Carpetright is in trouble and Prezzo, an Italian restaurant chain is set to close more than 90 outlets. There a clear theme here that the High Street is in trouble. It is not just the corner shops and independents but well known chains too. Lots of people are set to lose their jobs.
It seems as if consumers are not spending. To what extent fears about Brexit are weighing on the British public I don’t know, but those with variable rate mortgages may be more cautious with interest rates rises expected down the line. It is clear the problems with the High Street are multifaceted with some retailers failing to adapt to the rise of online shopping. However I cannot help put blame on what for me is the most unfair, retrogressive tax in the UK – business rates. Many businesses recently have had to cope with double and even triple digit rises in business rates, due to their linkage to local property prices. For example last year traders in upmarket Southwold in Suffolk faced rate rises of up to 177%. What I intensely dislike about business rates is that it is a tax on a shop simply opening its doors to trade, whether it sells anything or not. The business may have a low turnover and make a loss and yet it is still taxed on its rateable value. In contrast most taxes are based on ability to pay – the more you earn the more income tax you pay, the more you can spend in the shops the more VAT you pay, the more expensive the house you can afford to buy the more stamp duty you pay. I for one would like to see a much fairer system of taxing retailers in the High Street one that is based on turnover or profits. Moreover a level playing field is required with online retailers. During the business rates revaluation I understand Amazon saw its bill drop due to its distribution centres being located in less fashionable out of town locations.
So what do I conclude for investors. I have been cautious on equity markets for a long time now and throughout 2017 I have been advising clients to reduce risk, take profits and invest cautiously. That is still my position although I still advise selective equity investment. The tremors in early February and now this week may be early warnings of a bigger shock to follow. Time will tell. Ensuring good foundations, having a solid defensive portfolio offers the best protection in an earthquake. Let’s hope the house of Papa bear, Mama bear and Baby bear stand up. After all we wouldn’t want the porridge to get spilt, would we! As for Goldilocks she seems to have disappeared.
The content of this blog is my own understanding of the global economy and stock markets. My comments are intended as general commentary only. Nothing in this article should be construed as personal investment advice. You should seek individual advice based on your own financial circumstances before making investment decisions.