June 12 2012
With apologies to Churchill, so much is being written by so many about so little. It feels almost wrong to add to it. The noise around financial markets continues and the media drama shows no signs of dying down. What markets hate is uncertainty. And we have plenty of that. There are three main worries. The slowdowns in the US and China, and the never ending story of the European debt crisis. Depending on the day and the mood, different assets classes get pulled by one or another in differing directions.
The slowdown in the US
This problem lies at the heart of the global economy. Is the US economic recovery stalling or not? In our view we are seeing a pause in the recovery, not a return to prolonged slowdown. But the day to day evidence is clearly patchy. For every piece of positive news there is another of less comfort. The result? Investors largely avoid risk. And who can blame them? In an uncertain world, where returns are unpredictable in the short term, a place of safety is not an unreasonable position to take. And that has meant Treasuries not equities.
What about China?
Well here we have seen mixed data too. On the one hand the CPI numbers were lower than expected at 3% and May's trade data also surprised many. On the other, despite growing exports, underlying growth has shrunk. But China's policy makers still have scope to ease and it is likely that next month's CPI numbers will also show a fall. This is a long term game. An economy that size is not simply going respond to the changes it is subject to quickly, nor with the clarity investors might wish.
And so to Europe…
The drama trundles on. All driven by politics - and the continuing inaction of the politicians. Over the weekend we have had the Spanish 'bail out'. Essentially it's a recapitalisation of its banks through a loan of some EUR100 billion from the European Financial Stability Fund. But this is not the end of it. The piecemeal approach to propping up the financial system must come to an end with decisive action. And the politicians must not be allowed to escape their responsibility for the scale of the human tragedy. Unemployment, pension savings destroyed, families struggling. It is a profoundly sad situation that one nobody - least of all investors - should ignore.
So what now?
Well it feels like doom and gloom on a cold wet day in the English 'summer'. But is it really? We do not think so. But rather than add to the noise, we will keep it short. We do not feel the financial world is coming to an end. With the prospect of more positive data flow from the US, and the eventual resolution of Europe's travails, the 'risk' markets are looking good value. Corporate valuations remain largely sound in most economies. As we have said before, the same cannot be said of US Treasuries or Gilts. The key is to decide if we are traders or investors. If the former, then flipping a coin is as much use as trying to predict markets driven by politics. If the latter, then we must look through the noise to the reality of corporate growth and the prospect of a long term recovery. In that scenario, we should follow value. What is already priced in to markets? Where is more truly bad news coming from? These are the big questions. Ours answers are that markets already reflect the current situation, and that, bar unforeseeable events such as war in the Middle East, there is little more really bad news on the horizon. As a result, we will be buying into weakness, and looking for the longer term. It may not be rosy, but it is not all doom and gloom.
European Investment Management Limited is authorised and regulated by the Financial Services Authority. Registered in England and Wales number 06931664. Registered office is 98 Queens Road, Brighton, East Sussex BN1 3XF. This information has been prepared using all reasonable care. It is not guaranteed as to its accuracy, and it is published solely for information purposes. Our opinions are subject to change without notice and we are not under any obligation to update or keep this information current. It is not to be construed as a solicitation or offer to buy or sell securities and does not in any way constitute investment advice. The value of investments can fall as well as rise and you may not get back the amount you have invested. The income from an investment may fluctuate in money terms. If an investment involves exposure to a currency other than that in which acquisition of the investment is invited, changes in the rates of exchange may cause the value of the investment to go up or down. Past performance is not a guide to future performance. All rights reserved. No part of this may be reproduced or distributed in any manner without our written permission. European Investment Management Limited is a registered trademark. © 2011 European Investment Management Limited.