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Hurricane season

The summer brought some severe weather. Hurricane Irene caused destruction to the east coast of the US and another whirlwind has hurtled through world markets.

Investors have been running for the high ground as a raft of sovereign risk and growth concerns have unnerved equity and bond markets.

Financial markets are well on their way to discounting a Japanese-style economic outcome for the West. If the Japanese experience is ful-filled, the yield on 10-year US and UK government debt will fall to around 1 per cent before the banking crisis is over.

What was unthinkable before the financial fallout may become reality as the yield on the US 10-year hovers at 1.9 per cent.

The European banking crisis is unfolding at an accelerating pace. Credit markets have been warning investors to be increasingly cautious. High-yield and investment-grade credit default swaps have been moving towards their cyclical highs and Greek spreads over German government bonds have reached another high.

The European Central Bank is busy putting a sticking plaster on Italy and Spain as it tries to stabilise the cost of credit funding through the purchase of £19bn of their bonds in August alone – a tiny percentage of the £2.6trn of debt they have in issue.

Current ECB policy is most likely unsustainable and is being met with stiff opposition. Moreover, the possibility of contagion has only increased as Greece once again nears default.

Markets may have already written Greece off but it remains in the interests of the EU authorities to prevent such a default. In our view, they are merely delaying the inevitable.

Meanwhile, some businesses are finding themselves in a very different situation. You need only glance at recent newspaper headlines to be aware of the abundance of deals being done in the technology sector.

Microsoft bought Skype for $8.5bn in May, Google is acquiring Motorola’s mobile unit for $12.5bn and Hewlett-Packard has bid $11.7bn for Autonomy.
Many highly profitable companies are flush with cash in a low-growth environment. Some of them are going down the acquisition route in a bid to generate growth. Only time will tell whether this is a successful strategy.

We are all experiencing a deleveraging economic cycle, which will require further wealth destruction to take place before the global economy can heal.
We are ensuring our core managers are double-checking their portfolio convictions. It is at times like this their combined experience is worth its weight in gold.

John Chatfeild-Roberts is chief investment officer at Jupiter Asset Management

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