Fears of stalling US growth and mounting sovereign debts in Europe have sent equity markets into a downward spiral as nervous investors divert money into 'save haven' investments such as gold.
In many countries, fears of a double-dip recession reappeared, spurred on by the decision of the ratings agency Standard and Poor's to downgrade the credit rating of the US.
Many fund managers criticised politicians for failing to send a positive message to soothe the climate of fear that has wiped billions off the value of global stock markets.
“Disappointingly, the strength of corporate balance sheets and the ongoing reassuring corporate reporting season has counted for very little in the face of the negative macroeconomic newsflow,” said Tom Becket, chief investment officer of PSigma Investment Management.
However, not everyone is panicking. Private wealth manager Berry Asset Management claimed its clients were “cool, calm and collected” in the face of the turmoil. The firm said its multi-asset strategy offers some protection against the tumbling equity market thanks to defensive positions in index-linked gilts, gold and absolute return funds.
Fund managers are now anticipating action from the authorities. European Central Bank president Jean-Claude Trichet has signalled that the bank will buy Italian and Spanish bonds to inject liquidity into the market.
But this may not be enough to solve the problem. Mark Burgess, chief investment officer at Threadneedle, said the authorities may need to embark on a globally co-ordinated bout of quantitative easing.
“Getting to this decision however is going to be complicated and we may well need a catalyst in the form of a significant market crisis to make this happen,” he said. “Indeed we may be seeing the beginnings of this crisis now.”
Nick Price, manager of Fidelity's Global Emerging Markets Fund, also considered the possibility of monetary stimulus and insisted that the current environment offers an opportunity as well as a challenge.
“It is highly likely that governments may have to resort to inflating away their debt problems,” he said. “This bodes well for resource stocks, and especially those with assets less exposed to the economic cycle.”
He added: “We regard the current environment as a real opportunity to buy some really good businesses at some great prices.”
George Mitton, staff writer©2011 funds europe