Home, but not free

Glyn Owen, Investment Director at Momentum Global Investment Management, talks about the unexpected conditions we face as we emerge from the financial crisis:

“As we surface from the financial crisis, it is clear that the conditions we face today are no less extraordinary than those we have faced in recent years. Central banks have maintained their monetary experiment with ultra-loose monetary policy; in Europe we have the unprecedented situation in which the European Central Bank (ECB) has negative interest rates on deposits; there are negative interest rates on 2-year bonds issued by no less than 10 European countries, including Ireland, which was bailed out only four years ago, and where interest rates at the height of the Euro crisis in mid-2011 reached 23% on those same 2-year bonds; most longer-term sovereign bond yields in the Eurozone are at all-time multi-century lows and most other government bond yields around the world are close to all-time lows.

“Yet despite all the liquidity and near zero interest rates around the developed world, growth remains subdued and inflation is remarkably low. Not only hasinflation not risen as many of us expected after this long and exceptional period of loose monetary policy, but this year it has fallen further to levels in some parts of the world (most notably the Eurozone), which are in deflationary territory. At the same time the Federal Reserve (Fed) is trying to manage its exit from ultra-loose policy with minimal disruption. And the world’s great engine of growth over the past decade or more, China, is showing signs of a structural slowdown. 

“Amidst these economic uncertainties, the geopolitical situation globally is as unstable and unpredictable as at any time since the end of the Cold War. Perhaps no surprise then that equity markets, having been at all-time highs in many cases only a few weeks ago, are now going through a major correction or possibly something much bigger. How do we track a course through these uncharted waters and set our asset allocation strategy for the coming year? 

“There are several key themes that are likely to drive asset prices, all with a very substantial impact on markets and which are to some degree inter-related. These are: 

•       evidence of slowing global growth;
•       divergent performance among economies, especially between the US and other developed economies, notably the euro area and Japan;
•       largely as a result of the second, divergent expectations for central bank behaviour;
•       a slowdown in emerging market growth; and
•       sizeable shifts in relative pricing with a strong US dollar and weak commodity prices.

 “All of these have far reaching implications for asset prices and we suspect they are of much greater importance to asset allocation policy than all of the geopolitical problems combined. Overall, markets are presenting us with the best opportunity for two, possibly three, years to take on some additional risk and take advantage of this remarkable environment in which we find ourselves.”