Market View - November 2011

We seemingly live in a turbulent world of black swan events and incompetent policymakers!

Consequently as The Chief Economist of The Times Anatole Kalestsky recently warned, we have moved from the likelihood of "The Impossible" happening straight to "The Inevitable", while totally missing out on "The Improbable"! The catalyst once more for the latest market volatility has been the euro-zone debt crisis, barely a week after global markets seemed to be giving their seal of approval to the October 27th agreement from European policymakers on how to resolve Greece's woes, and pre-empt further contagion in the bond markets!

As The Economist newspaper summed it up in its Leaders article (November 5th – 11th edition), "Even by the euro zone's undemanding standards, a summit deal that survived less than a week is lamentable". The comprehensive package to save the euro orchestrated by German chancellor Angela Merkel and Nicolas Sarkozy, the French president lay in tatters, after Greek prime minister George Papandreou decided to call for referendum on the terms of the agreement.

However as The Economist confirms, blaming the Greek leader for the renewed uncertainty surrounding the survival of the euro would be wrong since "spreads between Italian and German government debt had begun to widen well before Mr Papandreou dropped his bombshell. If the euro zone had put up a credible firewall around the government bonds of Italy and other troubled euro countries, a Greek default would not now be threatening contagion".

However as The Economist also reminds us in the same article, the big question for the Greek people, and whatever Government surfaces from the latest crisis is the decision on whether to remain within the euro: - "Despite their anger, 70% of Greeks say they want to remain in the euro but their tolerance for austerity has its limits. The government must devote less effort to growth-destroying tax rises and instead undertake growth-promoting structured reforms".

The article concludes with the warning "Throughout the crisis, creditors - particularly Germany - have been worried about being too soft on the euro zone's weaklings, for fear that they would go slow on reform. Mr Papandreou has shown that they also need to worry about being too austere."

Sadly while Greece is yet again currently at the centre of the financial storm, it is just the tip of the global credit debacle iceberg which suggests the western world is broke! There is a very real and strong possibility that in addition to Greece, Portugal and Ireland could default in Europe, while in the United States, two of its largest states, California and Illinois could do likewise!

The total federal, state, local, corporate and personal debt of America is reckoned to be around $55 trillion, or approximately 400% of GDP, and there are ultimately just two alternatives to resolving the situation, namely default or inflation! While the former may well end being the fate of many western economies, for now, most are trying to engineer the inflationary solution through various stimulus packages such as quantitative easing by their central banks.

Inflation is a stealth tax that can all too easily devalue and destroy the portfolios of the unsuspecting investor. Historically one of the best ways to safeguard both the capital values and the income generated from savings and investments, is through a diversified portfolio which has both blue chip high yielding equities from western markets as well as exposure to the exciting growth prospects of emerging companies at its core.

Despite the crazy rollercoaster nature of markets in recent months, October on the whole was a rewarding month for equities with eth MSCI World (Capital return) index up 10.26%, the S&P 500 in the US up 10.77% and the FTSE in the UK climbing 8.11%. Even the FTSE EuroTop 100 rose 7.95%, while the MSCI Emerging Markets index was up 13.08%!