Comment: Markets don’t have their problems to seek

IT SEEMED only yesterday that stock markets were going gangbusters for recovery. America’s upturn looked increasingly assured and even in Europe there were encouraging signs of growth. Here at home, business surveys radiated confidence.

Bill Jamieson

Now the mood has changed. In London, the FTSE-100 has fallen more than 300 points, or almost 5 per cent, from its 12-month peak. European markets were down three per cent on the week. Tokyo tumbled 6.2 per cent. In commodities, copper – widely used by the Chinese in trade finance deals – fell 4.7 per cent last week, taking its fall on the month so far at 8 per cent to its lowest level in four years. Conversely, gold has risen $185 in recent weeks.

Not for the first time, troubles do not come singly but in battalions.

The dominant geopolitical story of the past few weeks has been Crimea and Russia’s increasingly aggressive intentions towards Ukraine. Concerns over this military situation are being felt across markets. Last week brought reports that Russian companies were pulling billions of dollars out of Western banks on concerns that the US might impose a freeze on the movement of Russian financial assets.

Shares on the Moscow stock exchange have fallen by 20 per cent so far this year. Meanwhile, there has been growing apprehension among Western banks over their exposure to Russia and they have been heavy sellers of Russian bonds.

According to the Bank for International Settlements, US banks and asset managers have some $75 billion (£45bn) of exposure to Russia. A “tit-for-tat” sanctions war between Russia and the West could have serious destabilising consequences for international markets.

Meanwhile, news of a corporate default in China last week stoked fears of a 2008-style credit crunch.

Last Friday there was another, when Haixin Steel failed to repay its loans. “No need to worry” is the view of some China hands – the government is seeking to engineer a managed squeeze on some of the country’s over-extended banks. But if there is a series of such defaults and other problems are quickly exposed, this could shake confidence in the country’s ability to continue as the world’s global growth leader.

At home, Bank of England governor Mark Carney delivered a reminder that interest rates will have to move up in due course. “Be joyful” was the gist of his pitch – rising interest rates would be a sign that the economy is at last returning to normal after five years of extraordinary monetary lifebelt support. While this may be objectively correct, investors worry that the first rise in rates may be quickly followed by others, with depressing consequences for business investment and for household spending.

And as if all this was not enough, one of the most popular sectors of the UK stock market last week was rattled by talk of an outbreak of a price war between the food retail giants. In this event, it is not just the share ratings of the giants that are at risk but that of smaller firms along the supply chain.

Sticking with Tesco

LITTLE wonder there has been a flight from supermarket shares. A far worse financial update than expected from Morrisons – a £176 million loss for the year to February – hit all of the quoted supermarkets. It is set to respond with an aggressive price war that threatens to cut deeply into margins.

The market share of the big four supermarkets is shrinking in the face of competition from the likes of Aldi and Lidl. But I am not sure if price cutting solves all their problems. Lifestyles are changing, as shown by the growth of convenience stores. Waitrose continues to grow apace. And it’s the irregular bargain offers at the likes of Lidl rather than sustained lower prices that is a feature of its popularity.

I would not ditch shares in Tesco at today’s level of 303.7p. Given the group’s enormous retail muscle, its share-gaining convenience stores and its expansion into online retailing, I would counsel against rushing to sell, even though Warren Buffett, the great investment guru, cut his stake by almost a third just before the latest tumbles.

True, recent like-for-like sales performance measured at Tesco’s large edge-of-town stores is down by 3 per cent. But sales at its Express convenience stores were up by 1 per cent.

Online sales as a whole were up by 10 per cent. Particularly striking are the sales advances in non-grocery areas. Tesco’s multi-channel approach could prove a winner, while the yield on the shares at 4.8 per cent provides an attractive underpinning.