Last week I attended a seminar in the City at a leading private bank and afterwards asked questions and had discussions with senior executives.
What follows is a distillation of the process so it is neither 100% the bank’s view nor 100% mine. For that reason I do not identify the bank,
I hope readers will find it useful .
Christina
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The World is a very different place from a year ago
++ State action across the world stopped bankruptcy of most banks
++General agreement that budget deficits too big and must come down - but when?
++Even near zero interest rates do NOT lead to increased demand for borrowing
++USA no longer able to pull world economy together and China doesn’t see the absolute need to take that role
++Investors now more savvy
++ “recession savage but short” This commonly heard saying - is it premature?
++ World-wide $6,000,000,000,000 (Six trillion) provided by central banks in liquidity
Economic Recovery will not be strong
++Cannot come from state spending or tax cuts
++Too much spare capacity to come from business investment and in any case banks won’t finance it
++Consumer spending won’t drive it as confidence gone, incomes not rising and job insecurity
++Ubnemployment won’t fall inflation will stay low (in short term)
++Only positive chance is exports , Sterling down 20% since summer 2008 BUT two largest markets also suffering recession.
The economy may surprise in next 6 months
++Confidence in banks returning and inter-bank lending now more healthy
++QE money reaching financial markets
++Asia growth now rising sharply
Stock markets respond to different influences from the economy
++ Stocks rise fastest at beginning of recovery on prospects (of capital appreciation) rather than on later actual improvemenrts. Analysts are pointing to expected increases in company profits
++QE designed to send newly printed money into financial markets. The massive extra liquidity needs a home at more than 0.5%pa. Result all asset classes have shown improvements
++Generally accepted that the tightening of fiscal policy is first priority
What does this mean for investors?
++Interest rates will stay low for “a very long time”
++Pound will stay weak “for several years”
++Returns on ‘risk-free assets’ will be negligible
++To get income investors must take more roisks
++Risk of rising inflation high, caused by QE. Consider gold and index-linked bonds if this happens
++China will forge ahead as Westerb countries struggle with massive debts and unfavourable demographics (pension black-hole!)
Key thoughts
++ Rally will go further
++Recovery will be sluggish - U-shaped rather than V -shaped -
++Cash is a bad decision
++Gold will protect against both DEflation and INflation
++Consider emerging markets
Will Rally continue?
++Western stock markets already up 50% from 2009 low
++Emerging stock markets up 100% from October 2008 low
++Oil up 1
00% from 2000 low
++Mining stocks up 150% from 2008 low
++Commercioal property shares up 80% from March 2009 low
++Once the ‘market’ gains momentum it can be very hard to stop
The Bear Attitude - Nouriel Roubini -
‘Markets gone up too far too fast. Correction likely in Q4 or in Q1 2010.’ In the short run we need monetary and fiscal stimulus to avoid another tipping point and to avoid deflation, but now this easy money has started to create asset bubbles in equities, commodities, credit and emerging markets. For the sake of achieving growth stability and avoiding deflation, we may be planting the seeds of the next cycle of financial instability”
The Bull Attitude - Crispin Odey
“Markets are now entering a bubble phase which may last until the end of the year. Individuasls and institutions are stampeding into real assets - eager to have anything but cash of government bonds. The latter are expensive because of the Quantitative Easing which has caused that bubble. At some point the QE will have to come to an end but until it does the bull market is sponsored by HN Government and everyone should enjoy it”
COMMENT A consensus between those two seems to lie in the cynical thought that if one is active in the markets on a day-to-day basis ‘Buy’ but get out FAST when the correction comes sometime in the next 6 months.. For others ‘Wait’ accepting a low interest rate from bank deposits with no ‘get-out’ penalties for the cash awaiting redeployment .
But remember that Keynes said “The market can stay irrational longer than you can stay solvent”
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BUT - Another view if one missed start of rally - Fine if one is a professional day-to-day investor
++Surely too late now?
++Not if one buys on dips
etc
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