Is there any good news or reason for optimism?
March 2009
In the latest of our series on managing
your assets in the current economic climate, we turn our attentions
to signs of good news. It is easy to focus on the negatives and
uncertainties that dominate the skyline during times of trouble.
There are, however, plenty of positives that can be extracted:
- All storms eventually pass.
- The old adage “what goes up, must come
down” is equally true in reverse as far as stock markets and
property markets are concerned. We expect more falls in both, but
eventually the floor will be reached. In many ways the sooner this
happens, the sooner a recovery can commence. Rapid falls (as long
as an investor is not fully invested at the time) serve to regulate
inappropriate behaviour more quickly than long drawn out affairs,
as the Bernard Madoff fraud highlights.
- Stock markets, in particular, anticipate
better times ahead and more often than not respond well ahead of
any economic recovery.
- With cash rates so low and as implausible
as it may sound, equities are a better long-term bet than cash,
even now. The problem is we believe they will become still cheaper,
perhaps even 20% - 25% below current levels, and whilst no one can
be certain and time the very bottom, such a bottom will eventually
materialise and, in our view, it may well occur before the year
end.
- Monetary and fiscal policy always takes
time to work its way through the system. What if all the various
measures taken by government and central banks actually work? What
if they are not slow to reverse the inflationary course they have
taken and simultaneously avoid deflation cutting too deep and
becoming engrained? What if they can gradually drain the excess
liquidity from the system at the same rate as the unfolding
recovery? What if consumer demand turns out better than expected?
What if property prices stop falling sooner than expected? History
records a number of surprising rallies amidst doom and gloom. In
just some of these above scenarios, perceptions could soon
change.
- Markets generally overreact on both up and
downsides. It must be remembered when markets recover, they
frequently do so just as quickly as when they fell. Uplifts of 30%
- 50% from their lows can happen relatively quickly.
- Whilst accepting negligible interest rates
frequently hurt savers, if inflation turns negative, in real terms,
the outcome can still be positive. In an environment where goods
and services become cheaper, savings become more valuable in terms
of spending power. New thought processes may well become necessary
in the short term, but we suspect they will not be needed for too
long.
- From a US and UK perspective, both have
independent currencies and can therefore print their own money, a
process known as “quantitative easing”. If not overplayed, they may
begin their cyclical recovery long before the rest of Europe. We
should begin to see the lagged impact of all their quantitative
easing within the next six to nine months.
The opinions in this article are those held
by the authors at the time of publication.