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Global funds get set to spin into action

Last week accountancy firm Deloitte & Touche warned that the world is on the brink of its biggest recession since the Second World War. With Japan and much of Asia already in recession, the US, it said, is set to be next, with Europe close behind.

The upside was its assertion that Britain is likely to get away with no more than a severe slowdown. But it maintained that the rest of the world was set for a difficult time and that this had very little, if anything, to do with the events of September 11.

Economist Roger Bootle says in the report: “The world was on course for a serious downturn anyway. While the aftermath of the September outrages will be negative, the lesson of history is that the economic significance of non-economic events is often exaggerated at the time.

“The upshot is that we believe that the world is set for a period of very low inflation, low interest rates and weak growth – but little of this will be due to the events of September 11.”

But despite the doom and gloom-mongering of economists such as Bootle, not everyone feels pessimistic about the short-term prospects of the world&#39s economy. Global fund managers continue to be particularly optimistic, with many citing the US attacks as an important factor in altering market sentiment.

Over the past 12 months the best of the global growth investment trusts have managed to produce a positive return or only dip marginally into the red. This has been no mean feat over a period which has seen the MSCI world index fall by more than 25 per cent.

John Walton is manager of the British Empire Securities & General Trust which has seen its share price rise by 2.2 per cent and its net assets fall by just 2.1 per cent over the past year. He believes that markets are now on the verge of picking up and is now looking to reduce his fund&#39s cash positions and move back into the world&#39s equity markets

He says: “The tragic events of September 11 exacerbated the downward profits spiral. However, while nobody can be confident that markets have hit the bottom, the psychology of markets seems to have changed significantly for careful re-entry.

“We have already bought back a number of stocks heavily down from previously disposed levels, and are poised to reinvest our cash and fixed interest over the next several months.”

Perhaps part of the optimism and stronger performance of the global growth investment trust set can be explained by the funds&#39 ages and firms&#39 experience. Many of the funds have been around for well over 100 years, and have long-term track records second to none.

Jeremy Tigue manages the Foreign & Colonial Investment Trust, which was launched in 1868. F&C boasts that £1,000 invested in the fund in 1945 would have been worth around £1.5m by the start of the new millennium.

Tigue says: “Such unprecedented market events always create volatility which in turn creates great opportunities for investors. The problem is having the experience and ability to take advantage of them.

“Nothing is better placed to seize these opportunities than a global growth investment trust which has seen it all before and has the breadth and depth of portfolio to act quickly to make money in the short and long term.”

For those that are cynical about fund managers&#39 persistent optimism, even in times of volatility, most have figures and graphs to back up their argument that the world is now at the bottom of the market.

Aberdeen Asset Management head of global strategy Michael Karagianis says that the pattern of global markets over the past six months looks very similar to the make-up of every other world equity market recovery over the past 30 years.

Taking the bottom of the recent market as about a week after September 11 the market now looks on track for a steady recovery over the next year.

Of three possible scenarios for the coming year, Karag-ianis believes that a moderate cyclical recovery is the most likely – with equities returning around 20 or 25 per cent in 2002. He concedes that there is approximately a 30 per cent chance of an extended bear market but also predicts a 15 per cent chance that the global economy will see a strong cyclical economy with equities bouncing by as much as 40 per cent.

Karagianis says: “We are expecting 2002 to be a better year for equities. However, there are four preconditions to a sustainable market rally. There needs to be a strong global policy response from central banks and governments. We need to see value restored to equity markets, a point we reached post-September 11 for the first time, since the Russian default and long-term capital management crises of late 1998.

“We also need to see a reduction in the global investment risk premium. Investors had become increasingly risk-averse this year, fleeing to bonds and defensive assets.

“And most significantly we need to finally see a stabilisation in expectations for the global earnings cycle, which has been deteriorating for more than a year now.”

With even the optimistic Karagianis forecasting a 30 per cent chance of recession, global growth funds can by no means be considered a safe short-term investment.

But with interest rates falling and cash returns looking increasingly unimpressive, now looks as good a time as any for the braver investor to start getting back into equities.

With the potential for markets to rally sharply from here, those who sit on their hands may well regret their decision.


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