Procrastinators of the world unite – you have nothing to lose but the future. Despite a big debate among excited economists – they do exist – the Federal Reserve Board was never going to raise US interest rates this month because economic data in the world’s two biggest economies, the US and China, is too weak.
If you were sitting on the Fed, would you vote to take the risk of choking off the recovery at a time when world debt, including that of the US government, is massively greater than it was at the time of the last economic crash? Or would you prefer to ignore the likelihood that the longer you delay the first rate rise, the steeper the rises will have to be in the future?
An extra $9 trillion has been borrowed in US dollars alone since 2009 – and that’s just outside the US. Any increase in interest rates will have a dramatic effect across the globe at a time when the main engine of growth, the 7%-plus annual increase in China’s GDP, is slipping away to the consternation of emerging economies and commodity producers.
Besides, higher US interest rates could push the dollar even higher on top of its 15% rise over the past year, which would make American exports more expensive. Meanwhile, there is no need to curb inflation in the US because, as in Europe, the threat is currently non-existent.
Stock markets have been very jittery while I was away, with drops of more than 100 points on a couple of days. The Fed decision does not wipe away those fears. On the contrary, it highlights the serious threats to the world economy without removing the shadow of interest rate rises in the US and UK coming soon following six years of artificially low rates.
However, I am firmly of the opinion that those fears are fully reflected in London Stock Exchange share prices, especially when you consider that shares quoted on the exchange will yield a record total of dividends this year.
In July I said that we had seen 6,000 points on the FTSE 100 for the last time. The index promptly dropped briefly below that level and it has happened again while I was away. At the risk of tempting fate, I will repeat: we now really have seen 6,000 for the last time. Those who sold in May have a great chance to buy back in at lower levels than we saw at the beginning of summer. The opportunity should not be spurned.
Sporting Chance at Profits
The launch of the Rugby Union World Cup reminds us that with a similar event plus European championships in soccer and the Olympic Games there is at least one big sporting event happening in three years out of four to boost sales in sports shops.
JD Sports Fashion (JD.) came up with figures this week covering the six months to August 1 – and pretty stunning they were, even before the first oval ball was thrown. JD had already warned the market that figures would beat previous forecasts by 10% but the actual 62% improvement in operating profits were even higher than revised expectations. Europe, where JD has high hopes, is profitable.
The big bugbear, as always, is the not-so-great outdoors. There was a good reason why Blacks and Millets were bought so cheaply three years ago: they struggle whatever the weather. Losses have been reduced but these two businesses have proved more difficult than JD expected, so I remain sceptical that they will break even next year.
JD shares have gained further ground since the results. Well done anyone who bought in April, as the shares have doubled since then against the general stock market trend. They do not look excessively expensive on 18 times earnings but I would not chase them higher. Retailing as well as sport can be remarkably fickle.
Rodney Hobson is a long-term investor commenting on his own portfolio; his comments are for informational purposes only and should not be construed as investment advice. His views are not necessarily the views of Morningstar UK.
