Interpreting market data, and timing capital investment

Simon Bittlestone, Managing Director, writes on markets and economics

Citi analyst Matt King’s alarming diagnosis of emerging market ‘credit exhaustion’, as reported in Friday’s Financial Times, is only the latest addition to a recent litany of pessimism from global business commentators. Corporate chiefs in the UK and US who have used the last few years of economic recovery to build their balance sheets at the expense of capital investment may now appear prescient. However, excessive restraint in this respect can be as damaging as outright profligacy.

A prolonged lull in real corporate investment has an adverse effect on innovation, competition and productivity in the mid-to-long term. In mature markets, however, these are the real engines of growth – to deprive them of investment is to deprive them of fuel. Business leaders who wish to make progress even through the predicted slowdown will need to look harder for opportunities in all markets, and taking them will require investment. It is not enough to simply maintain a defensive posture until normal market conditions resume – because that may take a very long time indeed.

In the US and UK, the expected statistical links between employment, wages, interest rates and inflation are either completely broken, or have become exceptionally elastic. These decidedly abnormal conditions have been around for so long that they are starting to get very familiar. The longer they persist, the harder it becomes to trust the usual cyclical cues for investment or consolidation.

And this is not just a problem in developed economies. Fears over a long-anticipated Chinese slowdown have obscured the possibility that it is a natural symptom of rebalancing, from manufacturing and investment, towards services and consumption. Indeed, consumer data from China, including outbound tourism, air travel and mobile internet subscriptions, paint a rosier picture than the macro view. Long-term, this shift could do much to redress damaging global trade imbalances, but the short-term shocks will be painful for some.

Much has been made of the alleged inaccuracy of Chinese economic figures, but that is not a localised problem either. The UK’s ‘double-dip’ recession of 2012 proved to be a statistical phantom – but by the time it had been revised away, the damage to consumer confidence was done. Modern economies are so complex that their headline data must be treated with caution.

In many respects, capital investment is like having a baby – there is always a reason not to do it, but if everyone obeyed that instinct, the world would be in a sorry state. Investment cannot be delayed indefinitely and, if conventional market signals offer no useful guidance, then a better decision-making process is needed.

Leaders looking to improve their market position in a turbulent business climate must define what really drives value in their organisation, and identify the data and analyses that will help them make the right decisions. Whatever their goals, enterprises in mature markets must be prepared to look for the combination of methodology and technology that can uncover underlying variances and trends long before they show in the headline figures.

Such insight into concealed leading indicators can form the foundation of an agile decision-making process and a responsive investment strategy – key to taking opportunities in uncertain market conditions.

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