“Snakes! Why does it always have to be snakes?!” Indiana Jones
No one would be surprised if the global stock market, having made a strong start to 2012, were to re-encounter its deepest fears at some stage. The three broad danger areas facing investment markets in late 2011 are all still out there. Namely: unresolved issues in the euro area; uncertainty about economic growth in the US and China; and, more subtly, a deep-seated investor scepticism about financial markets and analysis (and with it, a marked reluctance to take risk).
In the case of the euro area, we still don’t know just how widely (and messily) distributed will be the private sector losses onGreece’s bonds. Funding of the EFSF and the pending ESM is still unclear, as is the short-term budgetary outlook for the peripheral countries. There is an EU summit looming, but few investors will be holding their breath on that one.
The growth outlook in the US is still overshadowed by the possible expiry of tax cuts and labour market support, and (for many commentators, though not us) by the perceived need for drastic consumer deleveraging. China’s GDP may not have slowed noticeably yet – the last quarter’s deceleration was not statistically meaningful – but many still warn a hard landing is imminent.
Lastly, investor scepticism isn’t going to disappear any time soon – not least because the crisis has shown that much financial analysis has been in need of an overhaul, as our colleague Greg Davies, Head of Behavioural Finance, explains carefully in his new book “Behavioural Investment Management”.
But this doesn’t mean that there has been no progress at all since the autumn, at least under the first two headings. The ECB’s support for euro area money markets – with another potentially huge second tranche still to come in late February – seems to be capping the interbank spreads that gauge banking stress, as we thought it could. The improved tenor of US labour market data and consumer confidence is looking a little less like a seasonal aberration. Beneath the headline disappointments, US bank results suggest that underlying asset quality is if anything continuing to improve.
We continue to believe that the corner is very slowly being turned, and that both the euro area banking system and the global economy will regain some poise in 2012.
While we share investor scepticism regarding much financial analysis, regular readers will know that we are also wary of what passes currently for received wisdom even outside the pages of the efficient markets textbooks.
How often do you hear (for example): “We can’t pay for our pensions”; “There’s too much debt”; “The euro can’t survive”; or “Things haven’t been this bad since the 1930s”?
None of these assertions are necessarily true, and the last is not just wildly inaccurate but in questionable taste. To the extent that current asset prices have been depressed (or elevated, in the case of bonds) not just by the undoubted risks that are out there, but also by an overly pessimistic climate of opinion, there is more room (eventually) for a sustainable rebound in risk assets as worst fears fail to materialise.
Kevin Gardiner, Head of Global Investment Strategy
Filed under: Economics, Equity markets
