The end of the world or a new dawn? - 11/08/2011
The ongoing concerns over debts in the peripheral European economies and the continuing weak US consumer led economy undoubtedly provide causes for concern - but these are not new issues. In fact little has fundamentally changed to the economic environment over the past week. The one thing that has changed dramatically is confidence. The magnitude of market falls in recent days appear to be a fine example of herd driven panic selling rather than prices providing a true reflection of the medium term risk /reward profile of different markets and asset classes.
There is no doubt that fear of the global financial crisis remains in the forefront of investors mind and areas of the media have pounced on the opportunity to spread the gloom and doom. Robert Peston is enjoying being back in the limelight and scaring people with big numbers (although I don't remember "billions added to share prices" making the headlines after a good day on the market). A sustained lack of confidence can prove dangerous and it is vital that politicians and central banks act quickly to restore confidence in global markets and economies at this point. The ECB have already taken some action and it is very realistic that a third programme of quantitative easing will be implemented in the US which would act as an adrenaline shot for markets and the US and global economy. That said, it's worth pointing out that the corporate sector in many areas appears in good health (three quarters of US companies beat analyst expectations in recent reporting) and valuations of good quality equities are looking very cheap, both historically and versus the negligible returns available on cash and Government bonds. In addition, yields on Italian and Spanish government debt have dropped significantly over the last few days.
We remain of the belief that the economic climate in Western developed countries is going to be tough, but it is our belief that there are several areas that provide good opportunities for investors at the current time. However, it is important to point out that we have largely arrived where we are as a result of political inertia, as no coordinated world economic policy followed the controlling of the banking crisis. Unfortunately, at a time when long term economic decisions are required, short term expediency (ie the desire to be reelected) has been the overriding principle. Slowly we are seeing a realisation that that has to change, and maybe, just maybe, the current crisis will be a blessing in disguise by making policymakers realise that they have to treat the cause of the problem, not just contain the symptoms.
While the market volatility will be with us for some time we see no justification for selling assets unless cash is needed urgently. This is not a sell off on the scale of 2008/9 and the fundamentals are much stronger than in that period. Generally speaking the best advice is to keep calm, sit tight and be patient, but please feel free to ring us if you want to discuss your investments.
