I so wanted to cover a topic other than Europe this week, but then along came the two Georges – Soros and Papandreou, the latter being the Greek prime minister – and once again markets are dancing to Europe’s tune. Last week certainly did not begin in a comfortable fashion, with markets moving sharply into reverse as doubts over the ability of any lasting solution to the sovereign debt crisis being achieved rose once again.
It is hardly worth speculating over the motives that may have lain behind the call for a referendum to allow the Greek people to express their views on the bailout package as, by the time you read this, their government may have fallen. Such is the fragility of the situation in Europe that it is becoming impossible to make judgements on what might occur just a day or two ahead.
This is what is upsetting markets. They demand a degree of clarity and certainty – two elements sadly lacking at present. There is a growing frustration with the apparent inability of politicians to finally get to grips with the situation.
The European problem seems set to dominate investment thinking for the foreseeable future, which is a pity as the news elsewhere is by no means all as consistently downbeat as appears the case across the Channel.
We saw our own economic performance come out ahead of expectations, with GDP up by 0.5 per cent. This is hardly the type of news that encourages one to break open the champagne but at least we are not in negative territory. True, the announcement was dampened somewhat by a rather less positive purchasing managers index survey indicating that manufacturing orders were falling, but you can’t have everything.
Another piece of information that emerged last week was that Brazil is poised to overtake the UK to become the world’s sixth-biggest economy. Bearing in mind the country’s considerable store of raw materials and the size of its population, this should come as little surprise but it does serve as a reminder that the developing world is fast overhauling the developed one. India now ranks in the top 10 and, with its vast and growing population, will certainly be up among the leaders soon.
Yet emerging markets have fallen significantly faster than those of our own and the US since the beginning of the year. The MSCI Emerging Markets Index was down by nearly 17 per cent by the beginning of last week – more than double the fall of our own FTSE 100 and nearly four times that of the S&P 500.
Liquidity issues can bear part of the blame, but it strikes me that the risk-on/risk-off nature of markets these days does distort performance.
This is exemplified by the fact that the only place to have made money recently seems to have been our own gilt- edged market – and that of the US, of course.
The fact that investors are prepared to buy government bonds for a return guaranteed to be less than that of inflation seems strange to me – unless economist Roger Bootle is to be proved correct and our cost of living indices plummet.
Meanwhile, among the green shoots that should be encouraging investors have been signs that the American economy is picking up a little steam as manu-facturing jobs migrate home and infrastructure expenditure rises.
The US is a remarkable country. It is rich in resources and skills, so it may well emerge more powerful than ever from its current difficulties. But for the time being, all eyes are likely to remain on Europe.
Brian Tora is an associate with investment managers, JM Finn & Co