Market View - November 2010

Risk On or Risk Off have become all too familiar buzzwords in markets of late!

Commentators use the term risk on when the market appears happy with the prospect for robust economic growth and accordingly to load up on higher risk stocks and commodities, and the latter for when it's not so sure anymore so all bets are off and back into the arms of the US Dollar and US Treasuries it runs.

At the same time "People and economics are inherently unpredictable, and markets have never been as difficult to read as they are today"! So said Bill Gross (founder and CIO of PIMCO, and winner of Morningstar's accolade for fixed income fund manager of the decade 2000 – 2009) when interviewed in the Financial Times recently.

Adding to the uncertainty, The Economist this week in an article titled "Far from the meddling crowd" mused "It is doubtless a source of great mystery to the public why economists are unable to agree on the answer to a simple question: will austerity plans such as those announced in Britain this month, be good or bad for the economy?" After examining closely both sides of the argument including various research from Harvard University and elsewhere, The Economist article concludes "Temporary spending to pick up economic slack may be useful but the long term benefits of austerity seem clear"!

In a separate article, The Economist magazine appeared befuddled by recent market behaviour but suggested that "Quantitative easing is a kind of magic bullet helping all asset prices to rise" to explain why gold, equities and government bonds have all been performing well at the same time. In effect whether as an investor your economic expectations relate primarily to the risk of future inflation, the threat of prolonged deflation, or for the optimists amongst us, a healthy and sustained recovery, the prospect of QE seems to be just what the doctor ordered!

Meanwhile just two years after change had supposedly come to America, another change of course looks set to happen as the Republicans reclaimed the House of Representatives although the Democrats narrowly held onto the Senate. The exit polls showed that 80% of voters had concerns over the economy at the top of their agenda of US ills!

Back home the Governor of the Bank of England has been hitting the headlines with possible solutions for ensuring the world does not suffer another financial meltdown as in 2008, including breaking up the big banks into smaller ones and abolishing fractional reserve banking. Some might suggest Governor King has a word in Federal Reserve Chairman Ben Bernanke's ear with respect to trying to reduce the US federal debt now running at an estimated $13.6 trillion!

During October most asset classes continued to do well with the FTSE 100 index rising more than 2%, while the S&P 500 in the US did even better climbing almost 4%, and in Europe the FTSE Euro Top 100 was up 2.5%. Similarly emerging equity markets had a good month as the MSCI EM index climbing almost 3% with the pick of the bunch the Chinese Shanghai Composite index which climbed more than 12% in October! Bond returns were also healthy once more with the JP Morgan Global Bond index up 1.33% and the JP Morgan Emerging Market Bond index rising a similar percentage.

As we get closer to the festive season which is traditionally a positive time for global equities, we see no reason to change our asset allocation direction at this stage!