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Things that go bump

Multi-manager view

For historians who are into analysing the effects of economic, stockmarket and political change, developments on all counts have provided an abundance of riches in recent weeks. For those, however, whose responsibility it is to navigate increasingly choppy waters and to manage investment portfolios with real client money, it is arguably one of the toughest times on record.

In trying to stand back from all the noise and intra-day volatility, we are reasonably clear in our thinking on a number of counts. First, there would seem little dispute that global economic growth now being reported is more robust than most would have predicted just six months ago and could surprise to the upside in the coming months.

Furthermore, we find ourselves with extremely low interest rates which continue to encourage money out of deposit into higher-yielding asset markets. Supporting the recovery in asset prices has been the substantial recovery in corporate profitability driven by swift and substantial cost reductions early into the recession as well as a re-emergence of corporate merger and acquisition activity.

Second, it seems to us that until there is a significant pick-up in private sector credit demand, which would likely cause a reversal in central bank thinking regarding monetary policy, low interest rates could still propel equity markets towards new 2010 highs once the shock of continued sovereign debt concerns recede. Indeed, monetary policy seems destined to stay loose since the impen-ding focus on sovereign debt reductions around the world is likely to restrict longer-term economic activity to below trend levels for some considerable while, in other words, lasting years, not quarters.

You simply cannot reduce the public sector’s involvement in the economy to the extent being talked about at a time of sub-par private sector activity and expect growth to continue to expand beyond the artificially induced period that we are currently witnessing. Timing is less clear but we would suggest that 2011 proves to be much more of a chall-enge economically than 2010. This is particularly so since the Asian and other emerging markets seem unlikely to offer sufficient offsetting growth to compensate, given the tightening monetary backdrop now being seen to restrict their domestic inflationary pressures after substantial domestic stimulus provided in 2009.

Third, the euro region faces extreme challenges despite the recent support programme agreed between the constituent countries and the IMF. A more flexible approach to managing such a diverse range of economies surely needs to be found. The euro therefore seems likely to remain under pressure.

Finally, the fallout from the credit and banking crisis will surely result in more pervasive regulation for everyone oper-ating in financial services. Credit will be less freely available and more expensive while the decline in output in the west could be more permanent than hoped for. This does not necessarily mean people cannot make money but there will likely be more frequent bumps in the road and historical approaches to asset allocation will likely need adjusting.

Gary Potter is co-head of multimanager at Thames River Capital


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