Market misery
July 2nd, 2010
It’s been another bad week for shares. The market selloff continued, as investors worldwide worried about slowing growth, the possibility of double dip, and the poor state of the Euro area.
It’s one of those moments when investors need to take stock. Is this a new bear market which could lose us substantial sums of money? Will the world economy flop over again into recession?
We suspect it will not get as bad as that. The main forecasts are still for worldwide growth at a reasonable pace this year, with a lot of the action coming from emerging markets. It is true that China is slowing her economy through a bank squeeze, but we expect her to stop that process before there is a danger of going backwards. It is true that India is raising interest rates and does need to take some more steam out of the pressure cooker, but again we would not expect her to overdo it and end up falling. The USA has decided against another fiscal stimulus, but is already running a huge public deficit. It would be surprising if the Fed tightened money any time soon with so many worries about the pace of the recovery. That leaves Europe struggling. The problems of the Euro, the deficit reduction programmes and the anaemic money growth from damaged banks do mean slow growth at best overall.
The background to the decline in world markets comes from governments seeking to rein in deficits by increasing taxes, and fighting the last war against the banks by seeking to prevent another credit bubble when the priority should be to ensure enough credit to sustain growth. Today brings welcome news from Australia that the government there has backed off from the high tax on mining companies which had so upset markets. The G20 produced some indications of growing government awareness that any further strengthening of cash and capital by banks should be phased in in a way which is less damaging to economic recovery.
One of the reasons why markets are so spooked is they share a feeling that the governing authorities do not have much ammunition left to support banks and turn economies round where they are struggling. We have taken profits on US property recently, and on general commodities some time ago. We continue to avoid European equity. We remain with balanced cautious portfolios, with the equity emphasis on emerging markets.
