Hamish MCRAE: The wave of free money created by central banks is coming to an end


Hamish MCRAE: The wave of free money created by central banks is coming to an end


Two things happened last week that will help shape financial markets this year.

Both of these happened in the USA but taken together, they set the tone for UK investors and investors around the world.

One Monday, the first trading day of the year, Apple shares soared and briefly valued the company at more than $ 3 trillion.

This is an astonishing amount more than all the companies that traded on the Frankfurt Stock Exchange.

Cooling: A cool breeze has hit the world’s financial markets over the past few days

But then the price went back, so by Friday’s closing it was $ 2.8 trillion. It was part of a wider revaluation of the value placed on high-tech companies on both sides of the Atlantic.

Another Thursday came when the minutes of the December Open Meeting of the Federal Open Markets Committee were announced.

The committee set the Fed’s monetary policy and shocked the markets by the sound of minutes, which suggested that the Fed could raise interest rates faster and faster than expected.

Suddenly, the markets knew that the Fed was serious about dealing with inflation. The end of ultra-easy money was in sight.

Yields on ten-year US Treasury bonds rose to 1.76 percent on Friday, the highest since the epidemic struck in February 2020.

It has also pulled UK long rates. Our ten-year gilts yield 1.15 per cent at Friday’s closing, which is actually quite low in the long-term historical view, but the highest since May 2019.

Turning around in any market is a terrible deal, but let’s just say that we don’t see ten years of gilts yielding less than 1 percent this decade. We may be in the early stages of a 30 year bear market in fixed interest securities worldwide.

Should one even call the top of the high-tech boom? It is much more complicated. Start with Apple. It is a hugely profitable company, sitting on a pile of money.

Its price / earnings ratio is currently just over 30. This is more than a few years back by standards, and between the beginning of 2017 and the end of 2019 it traded mostly on P / E between 12 and 25. But it is down to 40 by the end of 2020.

There are a few US high-tech companies where current valuations are the result of hope and hype. I put Tesla in that bracket, despite the technical and marketing talent of Elon Musk, and the transformation it brought to the global motor industry.

But Microsoft? Or Amazon? They should have plenty of profitable growth ahead. What can happen is that the high-tech sector can be sorted out, which investors can justify their core valuations and really stimulate more often.

We have to cross our fingers that every bull market will eventually come to an end but its end will happen in a gentle manner.

Apple shares soared and the value of the company was more than $ 3 trillion last Monday

Apple shares soared and the value of the company was more than $ 3 trillion last Monday

The foam must fly and it destroys wealth. But in fact, that wealth was not really there. Should we be worried about bitcoin investors buying at the peak?

My answer is no. But in solid enterprises, investors benefit from losing their shirts.

The entire building of existing objects – non-fungible tokens (NFTs) and cryptocurrencies – can only collapse in the form of lines of computer code. We cannot know.

But what we do know is that in the last few days, the cold wind has blown in the world’s financial markets and the wind has been driven by the realization that the wave of free money created by central banks is coming. The end.

When that happens people have to figure out what is really valuable and what is not.

I am comforted by the possibility that the world is still in the early stages of periodic expansion. Historically, increases in interest rates associated with these fluctuations have generally outperformed equities.

That’s partly because economic growth yields solid returns, but solid businesses offer some form of protection from inflation. Footsie, despite weekly bumps, rose 1.4 percent at its closing on December 31 at 7,385.

There is minimal value there. If the hype of high-tech valuations persists and interest rates rise faster than expected, then what investors want is solid value.

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