PSigma's Tom Becket responds to recent events in Europe and the US.
PSigma’s Tom Becket responds to recent events in Europe and the US.
I have lost count of the number of times in the last few years that we have started newsletters by stating that “it has been an extraordinary few weeks for financial markets”. Sadly, the volatile grind upwards that equity markets had enjoyed so far in 2011 has been punctuated by an extreme and painful correction. The chief culprits behind the recent falls are the short term concerns of a slowing economy and the longer term structural debt issues, which we have discussed many times in the past. At this point we feel it is important to update you with our latest views on both of those issues, how we are positioned in portfolios and what we expect to happen in financial markets and the economy in the next few months. Sadly, making predictions about the future is harder now than it has been for a long time.
Over the last few weeks, we have seen problems that were thought to be issues of tomorrow, accelerated in to clear and present dangers. Chaotic scenes amongst the politicians of both Europe and the US have damaged the confidence of investors and wiped hundreds of billions of pounds off the value of global stock markets. Volatility in markets has surged, from already high levels. Disappointingly the strength of corporate balance sheets and the ongoing reassuring corporate reporting season has counted for very little in the face of the negative macroeconomic newsflow.
The problems first started in Europe in July, where investors had started to flee the Italian and Spanish bond markets, believing that those large nations were in the same leaking and creaking boat as their less-important peripheral cousins. As the cost of borrowing surged in both Italy and Spain, the European politicians and finance ministries were forced to act; they unveiled what they believed was a powerful package of promises to blow away the nerves and concerns of investors and draw a line under this sorry crisis. Almost predictably the measures fell a long way short of what markets had hoped for and after a powerful and sharp “relief rally”, equity and riskier European bond markets continued their declines. Amazingly, even after all the many warnings that financial markets have sent the European politicians, they are still way behind the curve in dealing with this sorry debacle. To compound matters further, it is the all-important holiday season now in Europe, so a further counter to the collapse in confidence in Europe is lacking, as Cognacs are consumed on the Cote d’Azur. The phrase “playing the fiddle while Rome burns” springs to mind. The warnings from financial markets should be heeded by the European politicians once and for all, so markets can stabilise and we can once again become more confident about the future. Decisive action is still needed.
(We should however give the European politicians a break, as at least they can agree on being useless). In America, the irreconcilable differences between the irresponsible and equally guilty Democrat and Republican parties have also created a vacuum in confidence and contributed towards the downdraft in asset prices. Watching the soap-opera politics unfold in the US as the warring factions finally negotiated to raise the debt “ceiling” limit was acutely embarrassing and shook confidence in the world’s largest economy. Certainly comments from the US’s largest creditor, China, are now particularly of interest and they rightly are unimpressed by the profligacy, the petty politics and potential losses their trillion dollar debt pile might suffer. The removal of the US’s treasured “AAA” credit rating late last week by Standard & Poors is another blow to the stability of the financial system and it comes at a truly unhelpful time. Our immediate reaction is that surely financial markets have had plenty of time to prepare for the US downgrade, which was widely expected and well telegraphed. However, we remain ever-surprised with the markets’ ability to be surprised by the unsurprising.