Healing, but not fixed

2010 has seen a welcome dose of reality return to global stock markets. Aside from a miserable first quarter, last year was characterised by strong equity markets. They blissfully ignored any bad news, as they rocketed up, almost eclipsing the carnage of the previous 9 months. Markets revelled in a recovering world, leaving many who were expecting a more pedestrian recovery aligned with poor economic fundamentals, defensively position and frustrated, calling for a correction which had yet to materialise.

Now it’s 2010 and markets seem more sober. Some news excites, other news disappoints. Sometimes good news disappoints, as it means interest rates may rise sooner than expected and sometimes bad news is good, as it means rates will stay lower for longer. So expect to be confused, as are markets, and expect them to most probably be that way for most of the year.

We have even had a minor correction. It should not really have come as a surprise, but interestingly it did. Throughout last year everybody was calling for a correction. Corrections generally don’t happen when everyone is expecting them. This year, market participants appeared more upbeat, as if they had decided that maybe a correction was not necessary after all, and that is exactly when corrections come.

And the correction was due. Equity markets have run too far too fast, given the state of the underlying global economy, which can at best be described as recovering. If this crisis really was the worst economic crisis in 80 years, then anyone would be naïve to think that there would not still be loads of people and companies (and even countries!) out there struggling to survive, and surviving only because interest rates are at record lows.

Much has been written regarding the financial health or lack thereof, of Greece, Portugal, Ireland, Spain and even the UK. What makes matters worse is that not only are most of these countries leveraged to the point where repayments could become a problem, they owe the money to the other EU countries such as France and Germany, therefore potentially destabilising the whole EU. And that’s without even mentioning the Eastern European banks, or the fact that the European Union says they won’t stand surety for any defaulting countries.

So expect a choppy year. Expect a few shocks to depress markets from time to time, but given the amount of cash still sitting waiting to invest and the fact that the world is recovering, you should see any weakness being used as a buying opportunity, thereby providing a floor and limiting the severity of potential corrections.

Given a lack of options, equities remain probably the place to be going forward, but as recent industry flow figures illustrate, the majority of investors are opting to allow professional fund managers, via asset allocation funds, to make the choices between equities, bonds and cash during these tricky times.