Summer swoon turns to autumn anguish

Did you know that the astronomical definition of our seasons define the first day of autumn as the Equinox, the day when day and night are of equal length? No? Nor did I.

What I did know is that this summer was distinctly chilly both in my Isle of Wight bolthole and on the financial markets. Between 21 June and 21 September, the FTSE 100 fell 10 per cent as worries over China, commodity prices, lingering Euro concerns and an all round feeling of unease continued to weigh on sentiment.

And as summer has turned to autumn (the first day of which was 21 September by the way) the trend has continued with the market bouncing around but on a downward trend as fears grow.

Fears about what exactly? Well, the narrative has run as follows; a few short months ago there was an increasingly confident mood that the economy was on the mend; the Great Recession was behind us, wounds in the financial world were healing and the era of extraordinary monetary measures was approaching the end. Gradually, almost imperceptibly at first, the mood has darkened. 

That great powerhouse that drove the world economy through its dark days via enormous financial stimulus, (no, not the US for once but China) suddenly found the pace all too much and burst a tyre. From there fears grew of the downturn in commodity prices, reinforcing deflationary trends in developed markets; a collapse of investment in energy markets and other markets exposed to China. It was but a short step then to a concern that the great stimulus provided by the Fed and other central banks around the world was beginning to wear off. Worse still, the patient seems to have become resistant to monetary medicine. A feeling permeates that the authorities have lost the power to cure the patient of that chronic illness, pessimism. A recession looms and the markets, forever the canary in the proverbial coal mine, are giving fair warning.

I’m sorry. As if watching your pension and ISA funds shrink by the day isn’t bad enough you have to read this stuff. Depressing…

But hold on a minute. Is it all that bad? Should business be bracing itself for an economic hard landing?

Some perspective might be in order here. Stock markets are, it is true, a discounting mechanism. They price in the collective wisdom of millions of participants about the future, but they are an imperfect predictor of the future. As economist Paul Samuelson once said, 'the stock market has called nine of the last five recessions'. In other words, the market is not always right.

Whilst China is a big deal, accounting for around 15 per cent of world GDP; that other enormous and trusty locomotive of global economic progress, the US, is puffing away nicely - with the economy growing at 3.9 per cent in the last quarter. The UK is following a similar path and there are signs of momentum gathering across the troubled Eurozone. Fiscal deficits are slowly shrinking, as we’ve seen the global economy is still growing, debt burdens (both private and public) are easing a little and incomes are finally growing again. Technological progress continues, the only real driver of economic growth per head.

So what is a business to do? Hunker down and prepare for Armageddon or ignore the gloom and plough on with new deals and new investments paid for by new debt?

It’s a tricky balance but the entrepreneurs we deal with day in, day out, never got anywhere by assuming the worst. Our counsel would be to proceed with cautious optimism. Look for growth, consider strategic and well-priced deals and consider well-planned investments. We can find plenty of money for good businesses with ambition; there is no shortage of capital looking for a return. 

There are risks of course and it would be prudent to make sure your business has the flexibility it needs. Keep a close eye on cash flow and liquidity, don’t bet the ranch on a single deal which might just be timed at the wrong moment and have a plan in place in case a likely economic slowdown does turn into something deeper. 

In summary, don’t overreact to a few months of falling prices and lurid headlines predicting economic gloom. Of course a recession is possible, but like the seasons, markets come and go (think Black Monday in 1997) and yet economies continue their jagged upward path. We’re planning for growth – we’d love to help you do the same.