Markets were disappointed by a stimulus package announced by President George Bush. The surprise 75 basis points cut in US interest rates, which happened in between scheduled meetings and was the biggest cut for 26 years, helped ease some fears but the move highlights the threat of a US recession.
The biggest surprise is the speed and extent to which equity markets have moved to discount an economic recession. At the time of writing, the FTSE 100 is 10 per cent lower this year, European bourses up to 20 per cent lower, US equities down by over 10 per cent and some Asian markets are off as much as 15 per cent. The reaction in Asia can be interpreted as the dismantling of the decoupling theory as these markets react to the increasing reality of a US recession.
After the sub-prime crisis, investors are grappling with downgrades to US monoline insurers. Major investment banks have started to write off some of their monoline-related investments and there are fears that further ratings downgrades, as happened at Ambac, will lead to further bank write-offs. We are seeing the financial crisis move to a new phase.
We started the year reasonably optimistic about valuations in equity markets. As markets fall further, there is greater value to be found. This value comes with a price – volatility.
A bad start to the year is not what investors would wish for but it takes a lot of pain out of the system. Plenty needs to be done to turn this rout into a positive return but these prices do represent better buying levels. Long-term investors such as the Sovereign Wealth Funds and Warren Buffett are not selling at these levels, they are buyers.
For investors, a more solid path through the financial quagmire will be a strategy that is well diversified both at the asset and manager level. Multi-asset portfolios meet this need. They offer a healthy combination of exposure to fixed interest and equity-based assets such as global infrastructure and real estate markets, which have recovery potential, and protected and structured products under Ucits III regulations.
Multi-manager funds offer a convenient and cost-effective means of establishing a broadly diversified portfolio through a single product that offers scope for long-term returns while limiting downside risks.
One thing we can be certain of is that the outlook is very positive for multi-asset-class investing and the multi-manager approach.
Aidan Kearney is co-head of multi-manager at Credit Suisse