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Peter Walls: Multi-manager view

Peter Walls MM blog

If you search ‘financial armageddon’ on the internet it is far from clear whether the beginning of the end of the financial world has already begun or if it is just around the corner. Delve deeper and you will be drawn into tales of failed fiat currencies and reminded of the alarming frequency of sovereign debt defaults throughout history.

And if you end up buying into the doomsters’ recommendations, you will soon be rushing off to stock up on bullion and hunkering down for the next decade.

The markets face big challenges, with the eurozone crisis rumbling on and fears of an even bigger US fiscal crisis, not to mention the prospect of a hard landing in China.

Given the scale of these uncertainties, it is unsurprising that perceived safe-haven government bonds in the US, Germany and the UK trade at levels that offer little prospect of delivering a real return over the next 10 years, while proclamations abound that the cult of equity is dead.

Playing devil’s advocate, with the exception of the gold bugs, few commentators are predicting the doomsday scenario, which would inevitably have to feature a default by the US government.

In such circumstances the accepted rulebook for assessing risk would be thrown out of the window and the vast majority of asset classes would fall in value. In theory, the entire risk-ranking table would be turned on its head as low risk government bonds moved from their current return-free risk status to junk.

Liquidity in capital markets would evaporate, corporate bonds and property markets would reprice accordingly and equity markets would suffer a serious setback.

With the exception of physical assets, value would have been irretrievably destroyed in the asset classes traditionally defined as offering the lowest risk. Inflation would take its toll on cash and some might then argue that capitalism itself should be consigned to the history books.

The only problem with this view is that trade and commerce are innate human characteristics that require a formal structure to succeed. Key to this process is equity – the very asset class that is naturally viewed as higher risk but also has an ability to survive.

It would be foolish to conclude that financial armageddon will not occur in the foreseeable future but there are encouraging signs that the world’s biggest economy, the US, with its dynamic private sector, increasingly competitive energy costs, leading technology companies and rising industrial production may surprise on the upside. If the politicians can muddle through and disaster can be avoided, the relative attractions of equities against most other asset classes are quite compelling. And if disaster does strike, the likelihood is that you will still have skin in the game so long as you can hang on in there.

Peter Walls is a fund manager at Unicorn Mastertrust fund


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