Market Commentary – February 2012
Comment on Current Market Conditions, by Andrew Merricks – Head of Investments, Skerritt Consultants
PROFESSIONALS’ VIEW – February 2012 Follow @Andy_Skerritts
Please note that these are our opinions and for information only. The content should not be taken as a recommendation of any investment and does not constitute advice The value of investments can fall as well as rise and past performance is not a guide to the future. The information contained within this document is for guidance only and is not a recommendation of any investment or a financial promotion.
Tiptoeing Through A Minefield:
It really does feel like we’re tiptoeing through a minefield right now. From an investor’s point of view, we know that we’re not going to get anywhere by standing still, but we can hear the bangs going off all around us. Cash is paying us next to nothing and we’ve been told that it’s going to stay that way for many months at least. So we need to edge forward, not least because inflation, though falling slightly, remains above the return that cash is giving us. Markets have rallied strongly in January. Is it wise to join the group that now appears to be sprinting headlong towards the other side hoping to make it before the next bomb goes off? It doesn’t take long for greed to replace fear as the dominant driver and that appears to be the case recently. Like driving on the motorway in a heavy fog, we know there’s something in front of us, we’ve got our headlights on, but we’re still not sure how far away it is. Stopping is too dangerous, so we proceed with caution hoping that we get through the other side safely. After all, the fog will clear eventually. It always does.
Why Have Markets Rallied?:
Last month we said the following: “So what needs to change in order for things to improve? In short, in our opinion, the ECB’s stance and unwillingness to declare itself as the lender of last resort to the bond markets.” Well, lo and behold, we may just have witnessed this happening. The ECB’s improvising of their 3-year long-term refinancing operation (LTRO) programme could be the game changer that we’ve been waiting for. It doesn’t solve the sovereign debt crisis single-handedly, but crucially what it does do is keep the banks afloat. “A few weeks ago, those lending institutions overexposed to distressed debt faced serious threats of a run. Not any more” reads the BCA Research note of January 20th. They continue, “through the LTRO programme, the ECB has bought three years of time for banks to raise more capital, reduce leverage and restructure their businesses. Granted, if potential losses were realised today, many banks would carry negative equity value, but with unlimited amounts of cash on hand, the risk of failure has been reduced.” The world has probably just discovered in the ever-developing language of what Bill Mott of Psigma Asset Management calls “the greatest financial experiment in history,” that LTRO is German for QE.
Familiar Faces:
Lest we get carried away with irrational exuberance, Bill Bonner in MoneyWeek reminds us that there are some familiar faces under the surgeons’ masks in the team tasked with resuscitating the Eurozone patient. Mario Draghi, recently installed as the head of the ECB, is a “veteran” of the World Bank, the Italian Treasury, and Goldman Sachs. “He was on the job in Rome while Italy was building up the debt that it now finds so hard to pay.” The head of the IMF, Christine Lagarde, was the French Finance Minister between 2007-2010 “when France grew its public debt by about 50%. Dust any financial crime scene from the last 20 years and you will find prints from them and their confreres. They are the very same people that brought Europe and the world to the brink of financial disaster.” Crikey, strong stuff.
Bonner continues to point out that the only real stress tests that mean anything are those exerted during real times of stress such as Bear Stearns and Lehmans. Until events bring things to a head, no one truly knows which banks or countries are insolvent. Gloomily, Bonner mulls, “most likely, they all are.” But this is where the ECB’s LTRO is so important. It has bought time. There are unlimited funds available for any bank that needs them. A backstop has been created for the banking system. This doesn’t solve the problem of Greece, Portugal et al defaulting, though.
March 20th:
This is the date that the next Greek bond matures. How much do they need to find? 14.5 billion Euros. There’s a fair bit of emptying old piggy banks going on we’d imagine. It is being widely reported that Greece is close to a deal on its debt in the short term, but the pain for the population is only now beginning to be felt. Already Greeks are crying “enough”, while the Germans are proposing to take over the Greek purse strings themselves. Didn’t Germany try to do a similar thing once before in Europe? Surely such a move wouldn’t end well. That Greece will officially default or not is a question that has been kicked around for many months. The time is drawing nearer to when an answer will be given, but in the way of markets, attention is moving on to the next poser. Greek fatigue is evident. Portugal has re-emerged on to the Euro-fretters’ radar. TwentyFour Asset Management has stated in a recent communication that “there is no doubt that Portugal is next in line behind Greece for market speculation and the contagion effect.”
BCA Research put it succinctly; “Trouble for Portugal means trouble for Spain.” Spanish banks have a 60 Billion Euro exposure to Portugal, which apparently equates to “roughly 70% of their common tangible equity”. Nevertheless, “removing Italy’s 1800 Billion Euro sovereign debt market from the casualty ward and replacing it with Portugal’s 160 Billion Euro market appears to be a relative success at the moment. On the face of it, an insolvent Portugal is affordable and absorbable, while an insolvent Italy is not.” Spain is on a par with Italy, but importantly from next month the ECB will take over the running of the EFSF and under certain distressed circumstances the fund will be able to buy secondary sovereign debt if a member country requests assistance and the ECB sees the situation as posing a risk to the Euro area. It’s difficult to argue that Portugal bringing Spain down does not fit this category, so it may be that a line is being drawn in the sand and the world can come out of its hedgehog-like hibernation and sniff the clearer air of Spring.
Rays Of Sunshine:
Remove the Eurozone crisis and there really are quite a few rays of sunshine out there. As explained earlier, an extreme outcome has become less likely, although not removed entirely by any means. With Armageddon shifted slightly out of the way, will investors start to focus on more optimistic issues such as US economic data generally surprising on the positive side recently; China edging towards a soft landing and the authorities out there beginning to display fiscal easing; the Euro bouncing on signs that the economy is not in freefall; and an increase in M&A (Mergers & Acquisition) activity generally (for example Xstrata and Glencore being the most recent)? We’ve said in previous newsletters that if the European situation can reach some kind of resolution then markets would turn their attention towards the attractive equity valuations that exist relative to the strength of the corporate rather than the sovereign world.
If risk is being increased towards equities, what will this do for the Gilt and Treasuries markets? They must be vulnerable to a sell off if this is the case and investors in these assets should be very aware that for “low risk” investments, the potential for capital loss is out of kilter with the risk expectation. Beware. Otherwise, to us, high yield bonds and their current yields look particularly attractive, especially if wrapped in an ISA so that yields of 7% and more can be either taken or reinvested tax free.
The End may be nigh. Whether it will be a good ending or a bad ending will become clear in a timely fashion, but for the first time in a long, long time we are actually beginning to feel a little more optimistic. Let’s just hope that, as we move from tiptoeing to lightly pacing through the minefield, we don’t step on something nasty that will blow up in our faces.
The value of investments can fall as well as rise and past performance is not a guide to the future. The information contained within this document is for guidance only and is not a recommendation of any investment or a financial promotion.
Contact us at: Skerritt Consultants Ltd, Skerritt House, 23 Coleridge Street, Hove, BN3 5AB. Tel: 01273 204999.
Market Commentary – January 2012
Comment on Current Market Conditions, by Andrew Merricks – Head of Investments, Skerritt Consultants
PROFESSIONALS’ VIEW – January 2012 Follow @Andy_Skerritts
Please note that these are our opinions and for information only. The content should not be taken as a recommendation of any investment and does not constitute advice
The value of investments can fall as well as rise and past performance is not a guide to the future. The information contained within this document is for guidance only and is not a recommendation of any investment or a financial promotion.
Happy New Year?:
2012 seems to have been coming for ever. The year is etched in our minds from the countless references to it, as, of course, this is our Olympic year. For many, it will be a once in a lifetime opportunity. True, it will have a cost initially and these costs may exceed the original estimates, but the short term pain will benefit many in the longer term in all sorts of ways, even though others may never actually see or feel the benefits directly themselves. In this sense then, 2012 can be seen as the Eurozone’s Olympic year too, as it will, we feel, be a defining year for the European bloc en masse, with costs to some areas offsetting the longer term effects to the wider whole.
So Where Are We At?
We are at an almighty crossroads. Spaghetti Junction appears as a mere Pelican Crossing in comparison, but a direction must be taken and how quickly we negotiate the hazards will determine how safely we emerge on to the straight and narrow again. 2011 was not simply an annus horriblis; it was an annus absolutely ghastlyius. There are not many to whom we speak who will not be sorry to see the back of it. The immediate future, however, does not exactly appear to be lined with much hope or anticipation either, but that may not necessarily be such a bad thing, with the darkest hour being just before dawn and all that. The pain trade last year was investing in the stock market as opposed to the bond markets or gold, thus being optimistic that all was fine and dandy in the jardins und gartens of Europe. The best performing UK asset class in 2011 was index linked gilts, while among the worst performing sectors was emerging market equities. How many commentators accurately forecast that scenario twelve months ago? Is this coming year going to be a continuation of this trend or is it a time to begin poking around in the ashes of last year’s forecasts to see if any bargains remain unscathed? Our guess is that it will get worse in Europe (and thus the effects on the rest of the world will similarly be aligned) before it gets better, but that once it begins to get better the recovery could potentially mirror the rebound that saw 2009 being such a profitable year for those who were prepared to put a bit of risk on the table.
Sources: Professional Adviser 22/12/2011 and BCA Research-Global Investment Strategy 09/12/2011
What Needs To Change? :
So what needs to change in order for things to improve? In short, in our opinion, the ECB’s stance and unwillingness to declare themselves as the lender of last resort to the bond markets. The debt tsunami is fast approaching. Italy has 150 billion Euro [yes, that’s billion, not million : Ed] of debt maturing between February and April this year. How are they going to pay this amount back to their debtors? If they borrow it, the rates that the bond markets will demand from them will most likely be out of reach. And to whom do they owe this money? Of course, it is not just Italian debt that causes the discomfort to European bank executives, but on top of Greek, Portuguese, Irish and Spanish woes, the Italian problem may be the straw that gives the banking sector the ultimate hump. In September alone, investors (most likely from the US and Asia) withdrew 100 billion from French banks. BCA Research point out that debt crises are not new, and it must be useful to look at previous ones to see how this one will most likely play out. There are many similarities between this current situation and the Great Depression of the 1930s and one of the most important lessons to learn is that monetary reflation is the only viable way to fend off the continuation of the debt crisis. “In essence, a debt crisis occurs when creditors have collectively lost their confidence in the liabilities they hold. As a result they liquidate their holdings for cash, creating a severe shortage of money. A central bank must increase the money supply in order to meet the escalating demand for money, or the banking system finds itself under siege. Without a lender of last resort guaranteeing the solvency of its lending institutions, a panic run and spreading failures among banks becomes inevitable.”
That, in a nutshell, sums up for us the likeliest scenario in the coming months. An “event” will force the hand of the ECB to proclaim itself in some form the lender of last resort that it has steadfastly refused to do thus far. We expect this “event” to trigger a further bout of volatility on the markets, with a subsequent period of instability, followed by a re-focusing on corporate fundamentals and a realisation that the world has not ended. It was Brooks Atkinson that said, “In every age “the good old days” were a myth. No one ever thought they were good at the time, for every age has consisted of crises that seemed intolerable to the people that lived through them.” While on the subject, a couple more quotes that may bring a smile or a sense of perspective to us are thus: “Nostalgia is a file that removes the rough edges from the good old days” (Doug Larson) and “everyone seems to think yesterday was better than today. Don’t wait 10 years before admitting today was great. If you’re hung up on nostalgia, pretend today is yesterday and just go out and have a hell of a time” (Art Buchwald). One hopes that Mr Buchwald is not put in charge of the ECB any time soon [he’s just finished running Italy hasn’t he?: Ed] but the overall tone of the message is one that we could all heed.
So What Happens Now?
The options after a debt crisis appear to be threefold – growth, default or reflate. Growth is virtually impossible in the short term, especially from countries such as Greece and others who are faced with massive austerity packages. Default and reflation are the two most likely scenarios and we can look back at previous crises for proof. 1992-93 saw the Sterling crisis and a devaluation of the Pound of 28%. 1993-94 the Chinese RMB fell 35%; 1994-95 the Mexican Peso lost 60%; the Asian Crisis of 1996-98 saw ASEAN currencies devalue by 55%; The Russian Rouble shed 76% in 1998-99; 1998-99 also saw the Brazilian Real fall 45%; it was the Turkish Lira’s turn in 2001 to drop 60% and the Argentine Peso lost 74% when they devalued in 2002 [BCA Research December 2011]. Each time it was only after events had come to a head and dramatic currency shifts had occurred that crisis-stricken economies could move on, but move on they did. The Euro is different of course because it is a mish-mash of numerous different States at varying levels of indebtedness, but looking at these previous events, who would bet on the peripheral states still being part of the “main” Euro in the future?
The ECB have been likened to walking on a treadmill, only moving fast enough to keep pace with the evolving financial crisis. BCA Research again put things concisely “in sum, the Eurozone needs a large infusion of money to alleviate debtor burdens. It also needs nominal growth to reduce indebtedness. This can be done either through default, a huge transfer of wealth from outside the Eurozone or ECB money printing.” China appears to have scotched the idea of the huge transfer of wealth idea if one takes the comments literally of Jin Liquin, Chairman of China’s Sovereign Wealth Fund. : “If you look at the troubles which have happened in European countries, this is purely because of the troubles of a worn-out welfare society. I think [the EU's] welfare laws are outdated. The labour laws induce sloth, indolence….some countries happily retire at 55 to languish on the beach.”
So ECB money printing it is then. Exactly when this will happen remains unclear, but with US data signifying a lessening chance of double dip that side of the Atlantic, the Chinese economy slowing but with scope for further reduction in interest rates there and throughout Asia, and many companies sitting on cash that they don’t know what to do with, the outlook once the European crisis reaches its nadir is actually quite promising. Let’s just hope it happens sooner rather than later.
The value of investments can fall as well as rise and past performance is not a guide to the future. The information contained within this document is for guidance only and is not a recommendation of any investment or a financial promotion.
Contact us at: Skerritt Consultants Ltd, Skerritt House, 23 Coleridge Street, Hove, BN3 5AB. Tel: 01273 204999.
Market Commentary – December 2011
Comment on Current Market Conditions, by Andrew Merricks – Head of Investments, Skerritt Consultants
PROFESSIONALS’ VIEW – December 2011 Follow @Andy_Skerritts
Please note that these are our opinions and for information only. The content should not be taken as a recommendation of any investment and does not constitute advice
The value of investments can fall as well as rise and past performance is not a guide to the future. The information contained within this document is for guidance only and is not a recommendation of any investment or a financial promotion.
No Such Thing As Risk Free:
There’s real fear out there. As the Eurozone debt crisis appears to be entering some kind of final phase, we are receiving more calls from individuals who are genuinely concerned about preserving their capital. Those with memories of 2008 are questioning the security of the very banks that hold their cash. The most common request at the moment seems to be for investing their money in something “safe”, in something with no risk. There is no such thing.
European End Game?
The situation in Europe is showing signs of deteriorating quite quickly. In less than a month, Italian and Spanish bond yields have risen to more than 7% (the point at which bail-outs were triggered for Greece, Portugal and Ireland). More significantly, they didn’t just spike this time. Even more significantly, French, Austrian and Belgian debt saw its’ yields rise to dangerous levels and Germany failed to get all of their bonds away in an auction that was probably the clincher in terms of making the politicians sit up and take notice that this thing just will not go away without drastic action.
Also within the last month we’ve witnessed changes of government in Greece and Spain. In August we said that democracy was one of the main problems with this crisis. Well, neither of these new Governments was democratically elected in what could be a telling shift towards Federal unity. Most people outside Germany seem to have reached the conclusion that this crisis will only be halted when the European Central Bank (ECB) becomes the lender of last resort and puts a firewall around thesovereign debtors. The ECB and Germany don’t share this view – yet; the former because they claimthat it is actually illegal for them to do so and the latter because they’ve had experience of going shopping with wheelbarrows instead of wallets as an inflationary fire took hold. It all feels as though we are hurtling towards an event that forces the ECB’s hand. Quite what this event will be is unclear. Unfortunately, quite when this event will happen is also unclear. And herein lies the problem for anyone who is risk averse.
The Risk Of Holding Cash:
Normally, cash is the best risk-free asset, but apart from only being guaranteed the first £85,000 of your money should your bank go bust (one suspects that the banks and authorities themselves don’t know the full extent of banks’ liabilities in the event of a European sovereign debt default, so how on Earth can we be expected to know?) we also have the major problem that interest rates are significantly less than inflation. This means that the only guarantee of holding cash for long is that you lose money in real terms as inflation gnaws away at its spending power. This doesn’t sound risk free. So, surely, if inflation is the worry, you simply hold your cash in index-linked gilts?
The Risk Of Holding Index Linked Gilts:
If we knew for sure that inflation was here to stay, these would be the perfect risk free investment. But we don’t. Mervyn King has continually said that inflation is artificially high in this country, and we agree with him. The one-off VAT rise will disappear from next year’s calculations, while oil prices have subsided a little from their highs earlier this year. Food prices also spiked earlier in 2011 so, with workers striking more to protect their jobs rather than demanding more money, wage pressure on inflation looks non-existent so the inflation rate could easily fall. If it does, so does the return that you receive from index linked gilts, but more importantly, so does your capital value as the flow into “linkers” reverses. This doesn’t sound low risk to us. So why not hold traditional gilts?
The Risk Of Holding Traditional Gilts:
Gilts have been described as “return free risk” lately. This may be a little unfair, but it highlights the fact that they are far from risk free. Traditionally gilts are portrayed as low risk safe havens, and to a certain extent they have displayed these characteristics during periods of market nervousness (some may say panic). But it is the very fact that they have been so sought after that has led them to offer very little by way of yield (like cash, below the rate of inflation) and their capital values appear exceptionally high. “At current prices, UK 10 year gilts would stand to lose 20% if bond yields rose to match current levels of inflation,” says Patrick Armstrong of Armstrong Investment Managers. This doesn’t sound low risk to us. How about holding gold? That’s portrayed as being a hedge against inflation isn’t it?
The Risk Of Holding Gold:
Gold has been a fair option as a safe haven since the credit crunch hit and it appears that it is still attracting investors at sovereign as well as domestic level. However, gold pays no income and is thus totally dependent upon capital values rising in order to deliver any return. It does not seem that long ago that we were talking about gold breaking through the $1,000 an ounce level. It now trades at around $1,800 an ounce, having touched $1,900 a few weeks back. It fell very sharply from $1,900 to $1,600 in just a few days’ trading. Gold, therefore, is volatile. This doesn’t sound low risk to us. So what about corporate bonds or equities? They (mostly) pay an income and that income is currently higher than you can get from cash or gilts.
The Risk Of Holding Corporate Bonds And Equities:
The risks of holding these are well known. There is an argument in favour of corporate bonds being lower risk than some sovereign bonds at the moment, but the fact remains with corporate bonds that if the company to whom you’ve lent money fails to pay you when due, you lose. Values in general tend to fall when there is talk of recession (as there is now) and equities are volatile on a daily basis. Bearing in mind that the FTSE 100 was at around 6,700 in March 2000, and that it is now flirting with the 5,000 level some eleven and a half years later, it takes a leap of faith to see equities as anything other than a pretty risky and poor investment over the longer term that has been this past decade.
However, at some point the Eurozone debt crisis will reach its end point (at least temporarily). When it does, and investors emerge from their burrows [bunkers would be more appropriate : Ed] we expect to see a sharp rally in equities as their low valuations and higher yields become exceptionally attractive in comparison to the low gilt yields and cash interest rates existing now. Gilts will fall in value, as will gold in all probability, thus triggering distress to those who have sought low risk shelter in such assets. But before this happens, we expect an event to occur, with the likely consequence that equities get a fair bit cheaper first.
So, risk-free investing does not exist at present. How long this continues is anyone’s guess (and guessing it is, despite what some commentators will claim). The only sensible thing to do in our opinion is to try as best you can to diversify your investments in such a way as to cover as many bases as possible to cope with whatever the world throws at us in the coming weeks. Doing nothing is risky. Investing too much in any one asset class is risky. In short, we have to accept that risk is an integral part of holding any asset at present and that managing that risk is the most that can be achieved. The first step though is to recognise the risks that exist.
There are a number of so called “low risk” products being peddled at the moment. Our advice is to tread very carefully if you are tempted by one as what is low risk one day can turn toxic the next. Feel free to ask us specifically on any of these issues.
The value of investments can fall as well as rise and past performance is not a guide to the future. The information contained within this document is for guidance only and is not a recommendation of any investment or a financial promotion. Contact us at: Skerritt Consultants Ltd, Skerritt House, 23 Coleridge Street, Hove, BN3 5AB. Tel: 01273 204999.
Market Commentary – November 2011
KICKING THE CAN ROUND THE M25:
It’s hard to believe that after what appears to have been one of the most tumultuous financial periods in modern times [forget the “modern” – try “ever” : Ed] we’ve actually spent the last three years getting back to exactly where we started. On October 3rd this year, the S&P 500 was at precisely the same closing level as it was on October 3rd 2008. It appears that the proverbial can has not only been kicked down the road in that time; it has been kicked around the M25 about five or six times and is about to set out on another lap. Time to stop kicking the can- if we can.
At least this process was started by Eurozone leaders in the early hours of 27th October when they finally agreed the following.
* A new 130bn euro bailout for Greece with 100bn coming from the EFSF and 30bn from the IMF.
*A voluntary haircut of 50% on Greek government bonds for private banks
*Recapitalisation of banks to the tune of 106bn euro by June 2012
*An increase in the firepower of the main bailout (the EFSF) to 1tn euro.
However, and it’s a big however, these agreements are in principle, and as the Financial Times put it later that day “the devil is in the detail and the data”
Hopefully more of the detail will emerge at the G20 summit in the first week of November in – and this does not bode well – Cannes, of all places. Surely someone could have come up with somewhere less kickable. Maybe the meeting will get kicked down the road to Monte Carlo. This trivial observation does the importance of the meeting an injustice. This could be the main opportunity for European politicians and world leaders to shore up the detail and deliver the sustainable “bazooka” for which the markets have been calling. Events in Libya have shown us that a bazooka of its own will find anyone who sits in a pipeline for too long.Markets rallied strongly on the agreements outlined on October 27th, but now it is time to scrutinise what is actually on the table. Let’s hope it’s not a case of “buy the rumour, sell the fact.
HERR CUTT – HERO OR VILLAIN?:
We’ve said in previous newsletters that the huge problem facing Europe is that, unlike the 2008 crisis that was dealt with by the US and Britain because it could be, the Eurozone has so many different parties intertwined that whatever the solution that is put forward, someone somewhere gets hurt quite badly.
And unless you are into that kind of thing, voting to hurt yourself seems counter-intuitive.
If you thought that the Eurovision voting system was long and tortuous, the Eurozone makes it look like a casual show of hands. We have only just received the votes from our Finnish and Slovak judges on the original EFSF proposal first mooted on July 21st. The next round of voting is likely to become even more complicated. It is at this stage that it goes public rather than just to the panel. French and German domestic elections are looming not far away. If it was Strictly Come Dancing she’d dream of receiving a 9. In Strictly Survival (Euro Version) a Nein vote for Angela Merkel from the electorate or German lawmakers spells an early exit.
With non-Europeans such as the US and UK (non-Eurozone in our case) becoming more vocal in calling for a BIG solution to be finally delivered, the emergence of a key character, Herr Cutt, at the core of the argument is clear.
The Greek problem, as we’ve said before, will not go away. The quickest way to make it go away is to allow it to default on its original debt and restructure. It is the extent to which it defaults that is now the main issue, not whether it will do or not.
Reluctant banks had initially offered a 40% “haircut”, but the headline figure of 50% was finally agreed after Angela Merkel and Nicolas Sarkozy joined direct negotiations on the issue on Thursday morning (source: BBC). The hope is that this level of “haircut” will see Greek government debt fall to 120% of GDP by 2020.
However doubts about the viability of the headline figure soon surfaced and the Financial Times subsequently commented “ The details are critical. Depending on how the programme is set up, bondholders could end up with something significantly less onerous than leaders touted on Thursday morning”.
Legendary investor George Soros is more doubtful still saying “Unfortunately, the 50% haircut is effectively less than a 20% reduction in the overall debt for Greece, because it only involves the private sector and excludes all the debt that is held by the ECB, the other public authorities, and also the debt held by Greece because the banks, of course, will now be insolvent.” (source: Sunday Telegraph)
In addition, European banks are now going to be recapitalised, similar to the US banks in 2008. James Ferguson in MoneyWeek says “there is a strong case to be made that Europe’s banking crisis has yet to begin. If that is indeed the case, the Euro is about to face a credit crunch that could dwarf the one seen in America, not least because European banking assets are a much larger proportion of GDP than they are in the US.”
Dexia Bank has already bitten the dust, having to be nationalised despite already having received 6 billion Euros in 2008 as a rescue package. How many more European banks are vulnerable to writing off levels of debt as high as those suggested? Sarkozy knows that French banks are among the most at risk. As we saw in 2008, just because you’re a big name does not mean you are free from contagion. The problem gets worse when banks mistrust banks and refuse to lend to each other. This freezes the system and triggers recessionary risks. And if you have embraced austerity measures, the last thing you need is lack of the very economic growth that is central to the recovery plan for your nation. And so you get social unrest and so you get the perpetuation of the cycle.
Europe is in a real pickle. Ambrose Evans-Pritchard in the Telegraph is succinctly gloomy; “If you look at each component of the Grand Plan, every one creates a secondary chain of consequences that may ultimately prove self-defeating. It is why I fear there may be no plausible solution to Europe’s crisis. The structural damage has already gone too far.”
BUT THE WORLD DOESN’T STOP TURNING:
However Europe turns out, the world doesn’t stop turning (we hope). There have been crises before and there will be many to come. Throughout it all, the world, and society, continues to function. Companies still make things. People still buy things. We can become submerged by bad news and fail to appreciate the positives. 1929 was not called the Great Depression for nothing.
2008 was bad, very bad, but there was a bottom to which markets fell. We may see the same again, who knows? But there will always be a time when markets realise that, actually, things are actually not that bad.
If the politicians can buy a bit of time, we can focus upon the other stuff, and that other stuff looks quite promising. China is slowing, but annual growth of over 8% is hardly near a tipping point. People have been asking for a Chinese slowdown to avoid the potential of a damaging boom-bust scenario out there. The US too does not look like it is slipping back into recession. “The overall environment, especially for US companies, is vastly better than it was in 2008” say Legg Mason.
We know that interest rates are to remain low until at least 2013 (Ben Bernanke has told us) so, if corporate US (indeed, corporate anywhere) is not faring too badly, and if companies continue to turn a profit and make cash, the sectors such as corporate and high yield bonds look worthy of interest, as they will pay a higher level of income to investors than cash or sovereign bonds as long as the underlying companies do not default on their interest payments.
Ultimately, equities too will benefit from the realisation that not all of them are going bust. The question though is at what stage do you think that they are cheap? In a secular bear market the temptation is to keep waiting too long for them to get cheaper still. Markets are strange beasts. It may not be a good idea to wait for the good news because it might never come. All that is needed sometimes is for the news to be less bad than expected. I’m not sure who said that “only monkeys pick bottoms”. He may not have been a culture vulture, but he may have had a point.
The value of investments can fall as well as rise and past performance is not a guide to the future. The information contained within this document is for guidance only and is not a recommendation of any investment or a financial promotion.
Skerritt Consultants, Skerritt House, 23 Coleridge Street, Hove, BN3 5AB. Tel: 01273 204 999
Market Commentary – October 2011
Comment on Current Market Conditions, by Andrew Merricks – Head of Investments, Skerritt Consultants
PROFESSIONALS’ VIEW – October 2011
Please note that these are our opinions and for information only. The content should not be taken as a recommendation of any investment and does not constitute advice
The value of investments can fall as well as rise and past performance is not a guide to the future. The information contained within this document is for guidance only and is not a recommendation of any investment or a financial promotion.
Would You Prefer Hanging Or Firing Squad?
Whilst having a choice is nice, it doesn’t necessarily mean that the underlying problem is solved. As the Eurozone debt crisis lurches from bad to worse, it is becoming clearer that, despite the best intentions of politicians, bankers and policy makers from all corners of the globe, the solution (if there is one) is going to be mighty unpleasant for some, possibly terminal for others. Unsurprisingly the terminal candidates are trying to make sure that it’s someone other than themselves who will bite the dust. Read more
Market Commentary – Sept 2011
Please note that these are our opinions and for information only. The content should not be taken as a recommendation of any investment and does not constitute advice
It Feels Like There’s Something Out There:
What have the Wall Street Crash of 1929, our own Black Monday in 1987, the ejection of Sterling from the Exchange Rate Mechanism in 1992, the sub-prime crisis in 2007 and the Lehman Bros collapse in 2008 got in common? They all happened during the months of September or October. As we tiptoe into September now, having experienced one of the most dramatic Augusts on record for market volatility, one cannot help but sense that there is something lurking out there which is going to add 2011 to the list of “Autumn event” years.
Unlike 2008, we can’t really claim that we have not been given some prior warning this time around should we experience a crash. Some of the signals are stark. Bearing in mind that last month we repeated the phrase “IT WON’T GO AWAY” in this newsletter, let’s examine some of the information that is available to us to see how the Eurozone debt crisis is unfolding.
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Market Commentary – August 2011
It won’t go away?
If there’s one thing that is becoming abundantly clear it is this ; policy makers and politicians in Europe, the UK and the US may talk, meet, discuss, wrangle, agree, disagree, agree to disagree, convene, consult and posture all they like, but the underlying problem – the mountainous debt crisis - WON’T GO AWAY. Tommy Tiernan, the Irish comedian, described the size of the problem perhaps the most accurately. We all know that Greece, Portugal, Ireland, Spain and Italy all owe amounts ranging from billions to gazillions. The UK owes a bit more, probably somewhere in the squidillions range. But the US? The US debt isn’t even a number. It’s an aaaaaagh type of noise. And IT WON’T GO AWAY.
Market Commentary – July 2011
Greece: Sticking plaster or longer-term solution?
Judging by TV pictures of increasingly large and hostile demonstrations in Athens, it was by no means certain that the Greek Parliament would vote in favour of the required austerity measures, a necessary condition for receiving the next tranche of aid. However, in the end they did, and by a larger majority than expected. Read more
Market Commentary – June 2011
Sell in May?:
We’ve all heard of the old adage “Sell in May and go away, don’t come back ‘til St. Leger Day”. Well, last year it was pretty well spot on, with Markets in general selling off and sitting in the doldrums all Summer before picking up quite spectacularly from September through to January. This year is shaping up to repeat at least the first leg of that pattern but of course past performance is no guarantee of future performance.
Market Commentary – May 2011
Still looking through to the fundamentals
Last month we touched upon improving fundamentals for companies around the world with markets beginning to refocus on these. This has been borne out recently in the US with the Dow Jones Industrial Average hitting its highest level since before the financial crisis (source: Telegraph.co.uk) and the Standard & Poor’s 500 Index rising to its highest level since June 2008 (source: Bloomberg) Read more
