Investors across the globe are continuing to endure a difficult time. Although a great deal appear...
Investors across the globe are continuing to endure a difficult time. Although a great deal appears to be happening, not much has actually changed.
Economies across the globe seem to have taken a collective deep breath, waiting for something to happen. Is it any wonder, after three consecutive bear market years, numerous accounting scandals and the threat of imminent war looming, consumers and investors are feeling a little low? The question everyone wants answered is whether this bear market has finally run out of steam. Have we now reached the bottom, at last?
There are some good signs around but the uncertainty of the geopolitical situation at the moment is clouding the overall picture.
The newsflow on Iraq is creating a great deal of short-term volatility for equity markets. Even the smallest and most spurious rumours surrounding Iraq are causing markets to bounce around all over the place. All eyes are on Iraq at the expense of the news, good and bad, that is being released via the usual economic indicators.
At less than $350 an ounce, as I write, gold has dropped off from its peak of over $380 at the end of January. Although this is still high such a fall would normally tell us that risk aversion had reached its peak. However, as the uncertainty surrounding the conflict in Iraq continues, the price of gold will continue to be volatile.
Negative sentiment towards equities is close to historical highs ' which as a rule is a positive sign. But this is not an environment in which normal rules apply. One thing that nearly every fund manager appears to agree on is that equities are extremely cheap. They are cheap relative to bonds, but more importantly on valuation alone they are cheap enough to warrant an influx of investment. But understandably investors are reluctant to enter the arena without some sort of encouragement.
Any potential catalyst is closely allied to events surrounding Iraq. Oil price is naturally a growing concern, particularly in light of the US's own consumption of Iraqi output. Prices are likely to stay higher for longer than expected regardless of when the conflict is resolved, and this will potentially be a drag on economic activity. More importantly, the attitude of the consumer, particularly in the US, and their reaction to what finally happens with Iraq, will be a key determinant in the short-term future of global economies.
But we remain convinced the long-term case for equities remains strong. And that in such difficult times, a diversified portfolio comes into its own. In recent years a key driver on performance has been asset allocation. Recent performance has come from bonds. But demand for bonds has in turn led to decreasing yields and increasingly limited opportunities for capital growth. Bonds are no longer attractive to new investors. Demand for equities is extremely low and returns from cash are minimal. Over the next few months asset allocation will have limited impact on performance. Equities in the UK, Europe and Japan look very attractive. The only issue is when the consensus opinion concurs with this view and investors are encouraged back into the market.
Equities are extremely cheap on valuations.
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