Mapping the Markets

Mapping the Markets

We are living in an age of indecision as far as global markets are concerned.  Is the ‘developed’ world heading for a double-dip recession?  Will we see rampant inflation just over the horizon?  Or will the world put the financial crisis behind it as the global economy romps away into broad sunlit uplands?

Perhaps though we are running ahead of ourselves somewhat.  It is almost two years to the day since Lehmans Brothers collapsed, thus plunging many economies into recession and rocking the world’s leading financial institutions to their foundations.  At the time there was a major injection of capital required to shore up bank balance sheets and this was followed by an unprecedented level of international co-operation to stabilise financial markets.

In the aftermath we felt that ‘Western’ economies would enjoy slower economic growth than emerging markets for the period 2010 to 2015.  We also believed that history suggested large scale government stimulus would result in above trend inflation; and a memory of 2001 to 2005 told us that low interest rates could lead to a sharp rise in asset prices.  The sheer shock of what occurred during the financial crisis made us believe that volatility across stock markets would continue.

The point is that as we approach the final quarter of 2010 our central hypothesis remains intact.  Compare the latest GDP (Gross Domestic Product)* growth for the UK and Eurozone, which shapes up to 1.6% and 1.7% respectively with that of China (10.3%), Brazil (8.8%) or even Turkey (11.7%) and the picture of global growth can be seen clearly.  In the UK the inflation hawks (those who support the higher inflation view) are now starting to win out over the doves (those of a more deflationary standpoint).**  Meanwhile since the stock market low of March 2009 the FTSE 100 Index has returned 66.6%***, supporting our view on asset prices.

The strength of the rally in developed market equities has surprised us and we felt that defensive equities with a globally strong market position would do better than more cyclical stocks, however, apart from this our view of the world remains similar to December 2008.

The lesson of this is that recalling the topography of the landscape from the map you studied, and referring back to it, is important when you’re stuck in a wooded valley with only the nearest hill in front of you.  Close up the terrain may be a shock but from afar it is but a mark on a map.

*The Economist - % change on previous quarter, annual rate, September 2010

** National Statistics Office – UK CPI currently 3.1% (above target of 2.0%), August 2010

***Financial Express Analytics – 6 March 2009 to 16 September 2010, (income reinvested)