We are in such a storm and it will take some time not just to blow through but also to assess the destruction, damage and detritus that has occurred.
So whilst it may be tempting for some to “sit upon the ground and tell sad stories of the death of kings”, frankly it is of remarkably little benefit and certainly not very comforting for investors. More constructively it is probably better to remind ourselves of a couple of the old investment maxims which have stood the test of various times, both good and ill.
Firstly is the issue of broad asset allocation. Ensuring that your money is broadly spread across both a range of asset classes and around the globe, is the best diversification from risk that you can have. Not all assets, though, behave the same way and it is the differing correlation between them that allows portfolio managers to try and control the balance of risk and reward. However in times of volatility, and depending on the level of fear in the markets, they can contaminate each other from time to time and suffer weakness as a group. This issue of the correlation of different investments is crucial and a good example of that was the equity bear market of 2000/3, when equities fell back significantly and other asset classes such as fixed interest and property held and gained value. This time the issue is more opaque and there are broader economic issues at play. It is not just an adjustment of ludicrous speculation into “dotcoms” but a global economic slowdown dangerously exacerbated by a credit crisis. Thus, if you have your investments managed across a broad range of asset classes, you may not be completely immune from any downturn, but certainly ameliorated from its worst excesses – and even have some asset areas which may actively benefit from it (like certain hedge funds, government fixed interest investments, along with cash and currency).
Secondly, remember the maxim of “Time in the market – not timing the market”. Consistently timing the market has been proven to be impossible and inevitably ends in tears. Until our frustratingly limited ability to travel time is resolved, such abilities will be certainly beyond my ken. Investment is a longer term game which I would always say is for a minimum of five years to take account of the unforeseen and unpredictable variations in the market. Investment is a slow cook – this isn’t the fast food business. If you want a financial kebab buy a lottery ticket – mind you, at least I don’t feel unwell after buying a lottery ticket.
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The debate about potential recessions in the US and the UK I find to be somewhat frustrating as the term itself usually conjures up quite often more emotion than the reality. From what we can see there is every likelihood of a significant slowdown in these two economies and yes they may well breach the accepted definition of a recession of two consecutive quarters of “negative growth”. However, what is probably of greater importance is the chance of growth being below the longer term trend levels. For example the US growth trend is probably at 3% but next year this may be at 2%. Such a trend towards lower growth may lead towards what could appear to be a weakening trend, with lower pricing power and even deflation – perhaps a shadow of what happened in Japan in the early 1990’s? This will be especially affected by the weakness of consumer spending, many of whom are likely to have been impacted by the fall in house valuations and its consequence effect on confidence. The next few weeks between Thanksgiving and Christmas may give us an interesting steer on this.
So where might the growth come from? One key area will be the ability for US exports to increase and thus a narrowing of the trade deficit. The falling value of the Dollar has seemingly had a positive impact as export volumes have been rising and imports falling as their costs have risen. So the continuation of a steadily weakening Dollar may well be the best way for the US economy to smooth out some of the imbalances – this is obviously all part of the Bush administration’s often quoted “strong dollar policy”!
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And finally… following on from the exciting Chinese news I reported earlier this year about the production of “day-glo” porcines, comes news of our Chinese cousins turning violent with a new wild pig “shoot-to-kill” alert being issued. It would appear that wild pigs have been moving into the residential areas of Hangzhou to take up residence. Now that will create a sub-prime issue.
Also some good news of a stowaway three week old piglet being rescued from the back of a lorry which was carrying a load of loo rolls to Tesco’s. Luckily Tesco’s have not “recycled” him but rather he has been safely delivered to an animal care home. His name, of course, is Andrex.
Have a good week,
Justin A. Urquhart Stewart
Director
Seven Investment Management