For a metaphor of how investors are coping with these uncertain times, look at the patient endurance of airline passengers in the aftermath of the foiled terrorist plot. “Sorry, sir, I am going to ask you to leave all your confidence about world economic growth in 2007 at the gate”. “Madam, please step aside of the queue and brace yourself for a prolonged period of instability in the Middle East”. “The expected fall in oil prices has been delayed indefinitely due to circumstances beyond our control. We apologise for any inconvenience.” Markets and companies have been subject to external shocks for years and investors have reacted like British Airways customers: with nothing more than a grumble. Such stoic resilience has created an unhealthy consensus that the era of solid markets and robust profits will last forever. Ironically for travellers no longer allowed to bring water on to their aircraft, the optimists refer to “liquidity” as the great safety net for the financial system. Companies, pension funds, banks and private equity investors are certainly flush with cash. But it is unclear why they should keep lending it at cut-price rates or spending it on ever more expensive assets. Every period of financial distress, from the Dutch “tulip mania” in 1637 to the Asian crisis 360 years later, has been marked by the kind of financial speculation and expansion in credit we are witnessing now. Admittedly, the “shock event” that triggered previous liquidity crunches – lean harvests, wars, corporate scandals – has yet to materialise. But the recent history of hurricanes, killer diseases and terrorism shows that there is no shortage of candidates. Investors should bear in mind that liquidity is a fickle friend and will disappear faster than they can say “bear market”.
Meanwhile, back in the real economy . . . nobody appears to know what is going on, at least in the US. Conflicting indicators, wayward corporate profits and a fuzzy outlook for commodity prices have left experts and policymakers dazed and confused. Wall Street economists were left with collective egg on their faces last week after not one of them was able to correctly predict a fall in a widely-watched inflation figure. Investors did not fare much better. When asked by Merrill Lynch whether the Federal Reserve should be concerned about higher inflation or lower economic growth, global fund managers split three ways, with a slight majority helpfully suggesting the Fed should worry about both. And while chairman Ben Bernanke works on his Cerberus-like appearance – one head to guard against inflation, one against a slowdown and a third to watch for stagflation – chief executives are running for cover. The Conference Board reports that only one in five business leaders expects the economy to improve over the coming months. Logic dictates that America’s captains of industry should make similarly gloomy noises about their businesses. Not in the testosterone-filled boardrooms of corporate America, I am afraid. Three- quarters of chief executives believe they will increase profits over the next 12 months. Given their unshakeable confidence, they will not mind too much the fact that investors don’t actually believe them. Fund managers’ present negative stance on corporate profits is the worst on record, apart from the aftermaths of the Asian crisis and the internet bubble. This cacophony of signals leads to three conclusions: CEOs may end up looking like Wall Street economists; investors should place lower valuations on companies; and Alan Greenspan got out at the right time.
Talking of confusion – and air travel – opinions are divided over whether the current restrictions on cabin luggage benefit or harm airport retailers. The question is crucial for hub operators and luxury products companies. The global market for goods bought at airports and on flights is worth an estimated $26bn (£14bn) a year according to Bain, the management consultancy, and accounts for a significant portion of sales and profits at the likes of BAA and LVMH.
The rules on what will be allowed on board are not yet finalised, but companies are already looking to exploit the new system. One idea being considered by the whizz-kids at the fragrance makers is a “one-dose” disposable perfume. The innovation may sound silly but never underestimate the ability of luxury goods groups to turn a crisis into gold. To be opened only while on board to avoid tampering, the one-off perfume would likely comply with
the new carry-on rules. More importantly, it would be a high-margin product – companies can usually charge relatively more for a smaller quantity – and guaranteed to result in repeat business. The trick, as with all aspirational buys, would be to devise a marketing campaign to make the new format desirable to passengers.
Slogans such as “Because you are worth it – at least once a flight” cannot be too far away.
John Plender is away