Page 73 - The Economist

The Economist December 9th 2017 Finance and economics 73
2 South African firm, notes that, by retaining lorries queuing at a typical African border tite Free-Trade Area, a separate scheme to
tariffs on just 5% ofproducts, African coun- post. The World Bank estimates that it linkthree regional blocs.
tries could in effect exclude most of their takes three-and-a-half weeks for a contain- Free trade runs counter to political cur-
current imports from liberalisation. erofcarparts to pass Congolese customs. rents in many countries, including South
A study by the United Nations Eco- African countries have a mixed record Africa and Nigeria, where governments
nomic Commission for Africa estimates on easing trade. A new one-stop border fear losing control over industrial policy.
that, with the CFTA, intra-African trade post has slashed the time taken to move They also worry about losing tariff rev-
would be 52% higher in 2022 than it was in cargo from Tanzania to Uganda by90%. But enues, because they find other taxes hard
2010. Since that assumes the removal of all even as tariffs have come down, east Afri- to collect. Patience over the CFTA may be a
tariffs, the actual effect will almost certain- can countries are also erectingnew non-ta- virtue, ifit gives countries more time to ad-
ly be more modest. Research also shows riff barriers, such as divergent standards just. The technocrats are optimistic. “You
that the largest gains come not from reduc- for goods. Informal traders, most of them create the foundation, then you can build
ing tariffs, but from cutting non-tariff barri- women, report harassment and extortion the house,” saysPrudence Sebahizi, the Af-
ers and transport times. That will come as at borders. Meanwhile multiple deadlines rican Union’s chief technical adviser on
no surprise to drivers in the long lines of have been missed on the road to the Tripar- the CFTA. “Even ifit takes many years.” 7

Buttonwood Keep dancing

Sharevaluations maybe high, butinvestors are still buying
NOTHER week, another record. The pared with the volatility of profits in the
ArepeatedsurgeofsharepricesonWall Twinkle toes national accounts. One reason for this is
Street is getting monotonous. The Dow Share prices, dollar-terms the much greater importance of foreign
Jones Industrial Average has passed an- Jan 2nd 2017=100 profits in the figures reported by US-
other milestone—24,000—and the more 140 quoted companies; the overseas portion
MSCI emerging markets
statistically robust S&P 500 index is up by rose from18% in1982 to 38% in 2015.
130
17% so far this year. Emerging markets Even allowingforthis, reported profits
haveperformedevenbetter,ashaveEuro- 120 are more volatile than they used to be. Mr
pean shares in dollarterms (see chart). Smithersarguesthatitisin the interests of
Political worries about trade disputes, S&P 500 110 managers to present higher profits when
the potential for war with North Korea 100 share prices rise and to understate profits
and the repeated upheavals in President Euro Stoxx 50 in bearmarkets. In the formercase, higher
Donald Trump’s White House: all have 90 profits will allow executives to meet tar-
caused only temporary setbacks to inves- J F M A M 2017 J A S O N D gets and exercise their lucrative share op-
J
tors’ confidence. No wonder the latest tions. Conversely, in a bear market, it is
quarterly report of the Bank for Interna- Source: Thomson Reuters worth managers taking a “kitchen-sink”
tional Settlements asked whether mar- approach—getting all the bad news out of
kets are complacent, noting that “accord- RuskinofDeutscheBankpointsoutthat,in the way so the next set of performance
ing to traditional valuation gauges that the manufacturing sector, South Africa is targets will start from a lowerbase.
take a long-term view, some stockmarkets the only country where the purchasing Share buy-backs add another factor to
did look frothy”, and pointing out that managers’ index is below 50—the dividing the equation. Companies tend to be
“some froth was also present in cor- line between expansion and contraction. trend-followers rather than bargain-hunt-
porate-credit markets”. Another boost is the expectation that ers when purchasing their own shares.
The authors of the BIS report are not America’s Congress will pass a bill that Since early 2005, the only two quarters
the only ones to worry that markets look will cut taxes for corporations, allowing when corporations have not been net
expensive. The most recent survey of them to pass more cash to shareholders. buyers were the second and third quar-
fund managers by Bank of America Mer- Confidence was also lifted by a decent ters of 2009. That was the period when
rill Lynch found that a net 48% of them third-quarter results season, which valuations were cheapest.
thought equities were overvalued, a re- showed that companies in the S&P 500 All this suggests that there is a riskthat
cord high. Despite that, a net 49% of man- managed annual earnings-per-share when the market does at last turn down,
agershadahigherthannormalallocation growth of 8.5%, according to Société Géné- the decline will be exaggerated. Share
to stockmarkets. rale, a French bank. But long-term profits buy-backs will stop and profits will de-
How do fund managers rationalise expectations are “ridiculously high”, says cline sharply.
this apparent discrepancy? First, they are BCAResearch,anadvisoryfirm,withearn- But judgingwhen that moment comes
more optimistic than usual about the ings forecast to grow at 14% a year in both is another matter. While the economy is
economy,witharecordnumberbelieving America and Europe. That would imply an improving and interest rates are low, it is
in a “Goldilocks scenario” of above-aver- ever-greater share of GDP going to profits, hardtoforeseethenextdownturn.Asone
age growth and below-average inflation. andanever-lowershareforworkers.Ifthat fund manager says, investors feel like
Second, investors are even more worried were to happen, support for populist par- Chuck Prince, a former head of Citigroup,
about bonds, the other main asset class; a ties would go through the roof. who was asked why the bank was still
net 81% think bonds are overvalued. In Analysts rarely tend to forecast falls in lendingin mid-2007, just before the finan-
short, they are piling into shares because profits.ButAndrewSmithersofSmithers& cial crisis. “As longas the music is playing,
they see no alternative. Co, a consultancy, points out that the earn- you’ve got to get up and dance,” he said.
Improvingeconomic data have driven ings per share of quoted companies have
the mostrecentspurt ofenthusiasm.Alan become far more volatile since 1992, com- Economist.com/blogs/buttonwood