Dec 2008-Jan 2009

NEWSLETTER: remember Jim Callaghan?

As one of the most dramatic years ever on the financial markets draws to a close, analysts are left with the unenviable task of dreaming up an outlook for 2009.
It ain’t easy. As ING Investment Management points out at the beginning of its crystal-ball gaze, “Recent developments in global financial markets have been so dramatic that even the rapidly deteriorating outlook for the underlying fundamentals in the economy can hardly explain the type of scenarios that are now being priced in by markets.”

Which is another way of saying, really, who knows? And, indeed, the unusual conditions may help to explain the wide divergence in views this year.

ING predicts “the most severe downturn since the early 1980s” for the global economy “as a result of a hit to confidence, a further significant tightening of financial conditions and an additional reduction in credit availability for households and businesses”. Against that backdrop, it sees a limited range of opportunities in 2009: on the bond side in high-yield bonds, investment-grade bonds and inflation-linked bonds, and on the equities side “among high-dividend paying companies, in strong emerging markets and in a few defensive sectors”.

At Blackrock, meanwhile, vice chairman and director, Bob Doll is calling the bottom. “At present, stock prices are above where they were when they first hit an important bottom on October 10, and our conclusion now as it was then is that equity markets are in a bottoming process,” he says.

There’s still some way to go, he adds – based on patterns observed during past recessions, between two and four months – but “the longer-term outlook is brighter”.

If you want to balance that cautious optimism with a bit of stomach-curdling gloom, try someone who really calls a spade a spade: my personal favourite, Max King, strategist and portfolio manager at Investec Asset Management.

“So far this decade, Argentina has devalued its currency by two thirds, defaulted on its foreign debts, manipulated its inflation rate down by over 20% and taken action to confiscate all private sector pension funds,” says King. “Is this a terrible warning about how democratic governments can act when their backs are to the wall?”

Banks are being nationalised “to punish naughty bankers rather than to fix the financial system,” he adds, and last year’s Canadian nickname for the dollar, the Yankee peso, now applies to sterling, but recovery looks much less imminent for the ‘sterling peso’.

However, the straight-talking King’s most telling – and chilling – aside is to remind us of the words of former British Prime Minister James Callaghan’s at the 1976 Labour Party conference: “We used to think that you could spend your way out of a recession and increase employment by cutting taxes and boosting government spending. I tell you in all candour that this option no longer exists, and in so far as it ever did exist, it only worked on each occasion since the war by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment as the next step.”

This lesson has been forgotten, says King. Ah, yes.

This is the last Funds Furope newsletter of the year, so may I take this opportunity to wish you a very merry Christmas and a happy, good New Year – whatever new excitements 2009 may bring.

Fiona Rintoul, Editorial Director
©2008 funds europe

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