Markets are feeling distinctly uncomfortable at present. Running the agreement on the US debt ceiling to the wire hardly helped but the ongoing eurozone sovereign debt crisis has been adding to the angst. Then you have the growing belief that the US will slip back into recession. Shares are finding few friends right now.
There is a lot of emotional pressure on investors at times like this. Technical analysts have long been saying that a breakout from the broad trading range that has contained shares on both sides of the Atlantic since the middle of the 1990s is more likely to be down than up.
With the seemingly intractable problems present in the developed world, such a viewpoint seems ever more possible.
The sea of red that characterises trading screens when times are tough can produce a downbeat approach from the professional investment community that exacerbates the selling pressure. The pinstriped sheep of the City persuade each other that the best approach is risk-off and equities should be forsaken in favour of gilts.
But does this really equate with what is going on in the wider world? British government securities saw 10-year yields hit a low last week. The net return for a 40 per cent taxpayer is now just one-third of inflation.
A more certain way of losing money in real terms can probably be found but gilts are meant to be a safety-first option.
The sea of red that characterises trading screens when times are tough can produce a downbeat approach from the professional investment community that exacerbates the selling pressure
Inflationary pressures could moderate. That is clearly what the Bank of England is expecting, given its reluctance to raise rates against the continuing rise in the cost of living. It is much more concerned about the anaemic nature of our economic recovery than higher prices on the high street. But what if price rises do not settle back?
History suggests sovereign debt crises generally lead to periods of higher inflation. Often this is because those countries affected see their currencies suffer in the wake of their domestic problems, usually to the relief of the government, which sees the debt it has accu- mulated devalued.
This might be more difficult to achieve with such a diversity of debt problems and several nations, such as Japan and Switzerland, actively seeking to lower the value of their currencies but dismissing persistent inflation would be unwise.
However, markets at present are indicating that inflationary pressures will fade and that sub-trend growth may be with us in the developed world for some time.
I do wonder, though, whether those drivers of inflation that have developed as a consequence of the growing affluence of the emerging countries will be reversed so easily.
I feel more inclined to treat the current adverse market sentiment as more of an opportunity than a threat. Life is going to remain tough for many of us in the overborrowed West. Continuing high inflation will merely add to the pain. But it will also expose bonds – or at least those who are seeing buying support as a safe haven – as a risky option when the cost of living is on the up.
Equities, on the other hand, should benefit as a consequence but we will only know which side of the equation achieves the ascendancy after the event.
Brian Tora is an associate with investment managers JM Finn & Co