The past fortnight has proven a difficult one for even the most resolute investor. Eurozone issues have created significant falls in indices around the world. Trying to find clear and concise opinion is very difficult as everyone tries to come to terms with what is going on and more importantly where we are heading.
The following is a statement issued by Standard Life Investments and I have decided to share it with you given that I believe it sums up the comments we have been following from numerous investment houses.
Commentators are vying to create the most frightening metaphor for the future of Europe: standing on a precipice, walking through a mine field, facing Armageddon. European share prices are down about 15% from their recent peaks, while bond yields in Spain and Italy are near levels which previously have triggered a response from the ECB.
Of course, markets are volatile when they are trying to price in the outcomes of new elections in Greece, parliamentary polls in France and the Irish referendum, against a backdrop of European summits. Political bargaining, opinion polls and votes will be the currency to analyse – often on a daily basis.
It is impossible to forecast the outcome of so many inter-linked events. For some time, Europe has faced a three pronged choice: muddle through, crisis or collapse. Collapse refers to the break up of EMU as we know it. Crisis refers to some form of Greek exit from EMU, possibly disorderly and possibly relatively contained by massive central bank support. The most likely scenario remains the first one – buying time and muddling through, which has been the case since the Euro-zone crisis erupted two years ago.
The pressure on governments to buy more time is considerable – not only because the risks of a major collapse are abundantly clear but also because, underneath the doom and gloom, two positive trends are appearing – small flames which need to be fanned into life.
The first is that the conditions are falling into place for growth in Germany, the engine room of EMU. It is beginning to experience wage pressures and a stronger property market as the recovery widens from exports and manufacturing. The second positive trend is the improvement in competitiveness in the rest of Europe. Some of this improvement is being forced on economies by government austerity packages, say in Ireland or Greece, while some is being voluntarily adopted, say by workers agreeing to wage restraint and productivity improvements at companies across Europe. The adjustment process will last many more years, but a start has been made.
European policymakers face vital decisions at their summits in May and June. Compromise on all sides can buy time for the necessary economic adjustment needed across Europe to develop even further. Failing to do so would lead to even more disorderly markets than those seen in recent days.
We also sought comment from The Chief Investment Officer at Equip who look after many of our clients funds. When asked if we should be adopting greater defensive measures Shane commented: -
"A good question, particularly with all the column inches the Eurozone is attaching. Our "diversfied basket" is giving us a defensive position whilst retaining a long-term outlook for the Portfolios. What we dont want to happen is an attempt to time the market fluctuations and end up getting torn in half. The underlying managers are also well placed and although we will experience some volatility I would hope we come out of it rather well"
Let's hope next week gives us some respite and we are all rewarded for sitting tight through these troubled times.
