I have long been something of a Jeremiah in this column about the runaway prosperity in the equities markets. I was among the first to blow the whistle on dot-com over-valuations in the early spring and, following US Federal Reserve chairman Alan Greenspan’s remarks of five years ago about “irrational exuberance” in the stock markets, I have seen nothing since to make US ratings look any less irrational as their exuberance has grown.
I even said, just before leaving London for August, that there might be something of a cooler reckoning when we returned to our desks and the evenings began to draw in. Towards the end of last week, that view seemed as if it might be vindicated when the central banks rolled their tanks across the borders of currency markets in support of the beleaguered euro.
The resonances with our last major intervention on Black Wednesday are audible. Britain left the Exchange Rate Mechanism, the Tories left the leadership of the opinion polls and Norman Lamont, and subsequently John Major, left government as a direct consequence. There is something quite neat about the Tories regaining a lead in the polls just as central banks start to support currency again and play chicken with the speculators.
Unlike Black Wednesday, when the UK stood irresolutely alone, we’re joined in the game this time by our European Union partners. Not being part of the euro-zone, arguably means that the UK is without the same level of downside potential as some of our continental cousins. The game has some distance to run. It appeared on Monday as though last week’s bear-run in the London stock-market had been stemmed initially, but there will be some scary times in equities this autumn as currency markets are tested.
The danger is that attention will focus on Gordon Brown and his opposite numbers among European finance ministers as this story of relative valuations unfolds. One of the other issues that I have consistently argued is that economies are no longer run by politicians and central bankers – they are run by businesses. One of the principal factors of international
e-commerce, and the globality that it has spawned, is that cross-border economic activity is led by companies not by governments. Heaven forbid that a government should break rank and re-introduce exchange controls to protect its domestic economy. But, in the absence of that intervention, we should be looking to the business world, rather than to the political arena, to gauge the true prospects of the euro.
The popular news agenda had it last week that the fall in equities markets – the FTSE 100 in London quietly lost 200 points in two days last week – was down to equities dealers finally rumbling that the weakness of the euro was something that should be of concern to companies anxious to maintain earnings growth. This is true, but it’s probably been the case ever since the euro was first coined.
In fact, the biggest reason for last week’s fall in equity values, which tested the psychologically important 6,000 level, was to do with a straightforward, but commercially doom-laden, profit warning from the world’s largest manufacturer of computer-chips, Intel. There are those of us who wish Intel would just go away, often for no better reason than we would be spared its irritating branding intervention in practically every PC commercial, which to my mind is symptomatic of Intel’s insecurity, rather than of its ubiquitous might.
And that turns out to be the point. Intel is incredibly powerful in the worldwide computer industry, but it is not invincible. Last Thursday, this industry power house announced that revenue-growth for the third quarter would be in the range of three to five per cent, significantly down on the nine to ten per cent growth that is expected in a usually buoyant industry sector as it gears itself up for its prosperous Christmas season.
Intel blamed weakness in European markets, which account for about 22 per cent of its overall revenues. So, in a sense, the story of the mini-slump in European equities may come indirectly back to the state of the euro. But, it has to be said, the link is fairly tenuous. In response to the Intel statement, Compaq, the world’s largest PC manufacturer, said that it didn’t expect any third-quarter sales difficulties in Europe. Dell, its nearest competitor, claims that its sales in Europe are recovering from depressed second-quarter performance.
So it may be that Intel simply over-egged its earnings prospects. And that is very worrying for market-makers, whose ratings depend on the words of the techno-magnates being gospel truth. Little wonder then that the market’s worst casualties came from the hi-tech sectors, fielding no fewer than 13 of the 20 worst performers in the FTSE 100. Such is the strength of reliance on the performance of companies such as Intel.
The politicians may strut their stuff in support of the euro in the coming weeks, but, in the end, it won’t be support for currencies that maintains economic growth, it’ll be support for companies such as Intel and, more broadly, support for the markets in which they operate which dictate the economic pace.
George Pitcher is a partner of issue management consultancy Luther Pendragon