Hamish McRae: Enthusiasm is sweeping through developed markets as companies rediscover their 'animal spirits'

Economic View: Maybe we should just be grateful that the corporate world is getting its mojo back

Animal spirits – that was Keynes's resonant expression to describe that particular form of optimism where investors put aside their rational fears in the hope of gain. This is picked up in the title of some new research by Fidelity Worldwide Investment, the fund managers, that analyses the changing mood of the global business community, but it was given a twist, for the full title is A return to animal spirits, a return to fundamentals. So maybe the spirits are not so irrational after all.

The research is a good place to start for those of us who are trying to calibrate the burst of enthusiasm that is sweeping through the developed market economies at the moment. There is certainly plenty of enthusiasm around. Global trade is rising and Western investment is picking up. We have the S&P 500 share index hitting all-time highs and London house prices up 18 per cent year on year. There are rising orders for manufactured goods in the US and good job-creation numbers. And as a counter-indicator, Italian bonds are the best-performing ones so far this year, with 10-year debt yielding 3.2 per cent, the lowest for eight years. There was even a story yesterday that they are being regarded as a "safe haven" for funds. When Italy is deemed a safe haven, animal spirits have indeed returned.

This string of stories is given shape by the Fidelity research. Its core message is that companies are beginning to want to put their cash to work by stepping up their investment plans. The graph shows how 43 per cent of the firms polled are more confident than they were a year ago and only 19 per cent less so. Expectations for capital spending are rising, mergers and acquisitions are expected to pick up, and the overwhelming majority of companies expect dividends either to be maintained or increased.

So all is pretty positive. There are sectors that are expected to be weak, such as raw materials, and inevitably worries, for example about energy costs. But there is also an awareness that some of the headwinds that have faced business in the developed world may be lessening. Thus there is little concern about rising wage costs in the developed world but an acute awareness that earnings in China are shooting upwards. The balance of advantage, which had seemed so adverse a couple of years ago, is tipping back towards the West.

Common sense has, however, taught us to be cautious whenever animal spirits appear to take hold. US equities are now on a price-earnings ratio of 17.4 per cent, well above the long-term level. To justify this needs a continuing flow of strong earnings. Here in the UK we have been more cautious, with the FTSE 100 index well short of its past peaks, though if you look at UK shares in dollar terms they have done rather better, with the pound touching $1.68 yesterday before falling back. Remember the FTSE 100 represents companies whose main business prospects are determined by the global economy, not the British one. It is a global equity index that happens to be denominated in sterling.

So how might this burst of animal spirits look in a long, historical context? I have been perusing some work by Pyrford International, the fund managers, who are quite cautious.

Their starting point is the very long run return on equities as calculated in the London Business School/Credit Suisse report on investment going back to 1900.

UK equities had a total real return (ie capital gain/loss plus dividends reinvested, deflated by consumer prices) of 5.3 per cent. US equities did a little better, 6.5 per cent, and Australian equities did best of all, returning 7.4 per cent.

That period did, of course, encompass two world wars, but even if you look instead at the past 50 years, 1964 to 2013, the total returns are not so different: 6 per cent in the UK, 5.8 per cent in the US, around 5 per cent in Germany, France and Canada, and 5.5 per cent in Australia.

Seen in this context, the surge in US share prices, up 179 per cent from the low in March 2009, looks a bit of an aberration. Pyrford notes that profits currently account for a much higher share of GDP than historical averages and are pretty bearish for equities on a five-year view, and very bearish for bonds.

The big point here is that markets are beginning to price in, if not a long boom, at least a long period of stable and above-trend growth. Goldman Sachs has done some work arguing that the so-called great moderation (less marked booms and less deep troughs), which ran from about 1980 to 2007, may already have returned. Certainly the past three years have seen steady growth in the US and we now appear to be seeing it here in the UK. But we have to get monetary and fiscal policy back to normal and the transition from ultra-cheap money to normal interest rates will be very fraught.

There's the nub: are these animal spirits the result of a genuinely better industrial outlook in the West or are they the creation of the central banks printing shedloads of money? Of course, it must to some extent be both. My instinct is that until a year ago the main impact of ultra-loose monetary policy was on asset prices rather than real output, but now, certainly in the US but also here in the UK, it is boosting real output. That optimism in Fidelity's analysis mirrors similar upbeat attitudes in surveys of industrial and commercial opinion. What we need is more of the animal spirits among corporate investors and a bit less of them among financial investors. But meanwhile, maybe we should just be grateful that the corporate world is getting its mojo back.

PROMOTED VIDEO
News
A 1930 image of the Karl Albrecht Spiritousen and Lebensmittel shop, Essen. The shop was opened by Karl and Theo Albrecht’s mother; the brothers later founded Aldi
people
News
Lane Del Rey performing on the Pyramid Stage at Glastonbury 2014
people... but none of them helped me get a record deal, insists Lana Del Rey
Life and Style
fashion Designs are part of feminist art project by a British student
Arts and Entertainment
Dwayne 'The Rock' Johnson stars in Hercules
filmReview: The Rock is a muscular Davy Crockett in this preposterous film, says Geoffrey Macnab
News
i100
Arts and Entertainment
British author Howard Jacobson has been long-listed for the Man Booker Prize
books
News
ebookA unique anthology of reporting and analysis of a crucial period of history
Life and Style
tech
Arts and Entertainment
Standing the test of time: Michael J Fox and Christopher Lloyd in 'Back to the Future'
filmA cult movie event aims to immerse audiences of 80,000 in ‘Back to the Future’. But has it lost its magic?
Sport
Louis van Gaal watches over Nani
transfers
Arts and Entertainment
Flora Spencer-Longhurst as Lavinia, William Houston as Titus Andronicus and Dyfan Dwyfor as Lucius
theatreThe Shakespeare play that proved too much for more than 100 people
News
exclusivePunk icon Viv Albertine on Sid Vicious, complacent white men, and why free love led to rape
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Cost Reporting-MI Packs-Edinburgh-Bank-£350/day

£300 - £350 per day + competitive: Orgtel: Cost Reporting Manager - MI Packs -...

Insight Analyst – Permanent – Up to £40k – North London

£35000 - £40000 Per Annum plus 23 days holiday and pension scheme: Clearwater ...

Test Lead - London - Investment Banking

£475 - £525 per day: Orgtel: Test Lead, London, Investment Banking, Technical ...

Business Analyst - Banking - Scotland - £380-£480

£380 - £480 per day: Orgtel: Business Analyst - Banking - Edinburgh - £380 - ...

Day In a Page

Noel Fielding's 'Luxury Comedy': A land of the outright bizarre

Noel Fielding's 'Luxury Comedy'

A land of the outright bizarre
What are the worst 'Word Crimes'?

What are the worst 'Word Crimes'?

‘Weird Al’ Yankovic's latest video is an ode to good grammar. But what do The Independent’s experts think he’s missed out?
Can Secret Cinema sell 80,000 'Back to the Future' tickets?

The worst kept secret in cinema

A cult movie event aims to immerse audiences of 80,000 in ‘Back to the Future’. But has it lost its magic?
Facebook: The new hatched, matched and dispatched

The new hatched, matched and dispatched

Family events used to be marked in the personal columns. But now Facebook has usurped the ‘Births, Deaths and Marriages’ announcements
Why do we have blood types?

Are you my type?

All of us have one but probably never wondered why. Yet even now, a century after blood types were discovered, it’s a matter of debate what they’re for
Honesty box hotels: You decide how much you pay

Honesty box hotels

Five hotels in Paris now allow guests to pay only what they think their stay was worth. It seems fraught with financial risk, but the honesty policy has its benefit
Commonwealth Games 2014: Why weight of pressure rests easy on Michael Jamieson’s shoulders

Michael Jamieson: Why weight of pressure rests easy on his shoulders

The Scottish swimmer is ready for ‘the biggest race of my life’ at the Commonwealth Games
Some are reformed drug addicts. Some are single mums. All are on benefits. But now these so-called 'scroungers’ are fighting back

The 'scroungers’ fight back

The welfare claimants battling to alter stereotypes
Amazing video shows Nasa 'flame extinguishment experiment' in action

Fireballs in space

Amazing video shows Nasa's 'flame extinguishment experiment' in action
A Bible for billionaires

A Bible for billionaires

Find out why America's richest men are reading John Brookes
Paranoid parenting is on the rise - and our children are suffering because of it

Paranoid parenting is on the rise

And our children are suffering because of it
For sale: Island where the Magna Carta was sealed

Magna Carta Island goes on sale

Yours for a cool £4m
Phone hacking scandal special report: The slide into crime at the 'News of the World'

The hacker's tale: the slide into crime at the 'News of the World'

Glenn Mulcaire was jailed for six months for intercepting phone messages. James Hanning tells his story in a new book. This is an extract
We flinch, but there are degrees of paedophilia

We flinch, but there are degrees of paedophilia

Child abusers are not all the same, yet the idea of treating them differently in relation to the severity of their crimes has somehow become controversial
The truth about conspiracy theories is that some require considering

The truth about conspiracy theories is that some require considering

For instance, did Isis kill the Israeli teenagers to trigger a war, asks Patrick Cockburn