A world of tweets and greater market volatility now wash up on our shores

DISRUPTORS COME OUT OF THE WOODWORK IN NO TIME AND THEIR EFFECT ON BUSINESSES THEY REPLACE CAN BE DEVASTATING

It is no longer unusual for stock-market indices to have big intraday moves, either way. Even the mature, highly traded S&P 500 index (a proxy for aggregate US corporate performance) regularly moves up or down by a couple of percent a day. The values of individual companies can move by multiples of that. Sometimes there are valid facts (such as an earnings update or discovered fraud) that can cause extreme changes in company values forever. We expect that.

But in the absence of material factual change, now reasons beyond fundamental valuation metrics are causing unusually big moves. Moves between indices and across geographies are likewise getting bigger, inconsistent and less easy to explain, let alone expect or predict.

Tried-and-tested valuation techniques are no longer universally valid (though their purpose wasn’t ever to explain short-term variations).

Like it or not, companies and countries operate less and less in a vacuum. External factors and the behaviour of others are playing a huge role. We are sensitive to and often influenced within seconds by a chirp (call it a tweet, if you like) here and there, and we’ve technology to thank for that. Tweets are presumed to have substance, no matter how unqualified the author is to express an opinion, or even whether the information is factual.

It used to be quarterly earnings reports and trading updates, as required, in a standard format. Valuations, one way or another, were just present values of future cash flows (growth prospects), supported by capitalisation of past earnings evidence.

Nowadays things are different. Client acquisition strategy is the new thing and actual profits must stand aside for growth in users, who are initially attracted at a cost, to be “harvested” later (I’m being kind). Data is money.

It’s the exogenous variables and forces we must watch out for now. Disruptors come out of the woodwork in no time and their effect on the established businesses they will replace can be devastating. The new kids on the block are not standing by for the old guard. The rise of the new and the fall of the old is happening much faster than ever before. Access to global markets, leverage of human capital and connectivity are to be thanked for that. Modern-day disruptors are replacing established business, not just competing with it.

Politics plays a huge role. A presidential tweet can fundamentally change future trade partner expectations, or the sovereign cost of capital. The effect of the US-China trade war if, and to whatever extent, it happens will be overwhelming. There’s almost daily uncertainty and a lot of titfor-tat. We all know how those spats end up they destroy value (for both sides).

Across the globe, but particularly in the more determined emerging superpowers, the role of the state has increased and its policy changes are felt immediately.

Tariffs and incentives are the new sticks and carrots. The mood is about protecting your own and fighting the rest. That’s all very well for getting the popular vote, but it limits the very growth and development funding enabled by global trade.

Monetary policy is firmly back in focus. The stimulus measures applied to rescue big business (read banking sector) are scheduled to come to an end in Europe and the US. Not everyone wants the help to go away, and that indecision drives volatility. I’ve never been convinced that monetary easing and its implicit currency effects was the medicine required for a permanent cure. Impacts on emerging markets are particularly acute as their fight against inflation and currency weakness continues, every day.

In time, these significant and immediate effects begin to change investment psychology. Instant-gratification capital is stealing a bigger and bigger slice of total investment capital and long-term, asset-based projects are becoming more difficult and expensive to fund.

One consequence is that this responsibility falls increasingly on the state to drive major capital investment or, at least, partner it in some form, including policy incentives and protections. In turn, that makes the state even more powerful and necessary, but completing that circle isn’t always virtuous.

Conventional wisdom has always been that if you invest in the real economy, you’ll be fine. Ignore these newfangled ideas, build a factory.

I’m not sure that will hold entirely anymore. A new balance is emerging.