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Torrents of spring

For a number of years, economies around the world have enjoyed interest rates that have been held too low for too long, allowing ever increasing amounts of debt to be taken on by individuals and companies. This debt overhang is starting to unwind. In the face of market falls, one might be tempted to become a little more optimistic but the fact remains that the financial market issues now troubling governments, central bankers, companies and private individuals are many in number and complex in nature.

There is no doubt that central banks and governments are acutely aware of the damage that a lasting financial crisis can have on economies. The US has been at the forefront of the adjustment phase, with interest rates having been slashed to 2.25 per cent since last summer. The Bank of England has begun cutting rates and although the European Central Bank has yet to adjust monetary policy, as it is more concerned about the prospects of rising inflation, it is only a matter of time before the reality of a slowing global economy dawns on European policymakers.

Swings in currencies have influenced our asset allocation. We have progressively reduced exposure to the UK and continental European equity markets across our five funds, adding to Asia and the emerging markets. The developing world will not be unscathed by the global slowdown but we do believe the outlook for investment in this area will continue to improve relatively and many of the developing world’s economies, such as those in China, India, Russia and parts of Latin America, will find their economies more resilient due to higher domestic consumption and rising living standards.

Where investment is made into fixed-income investments, we have increasingly had a preference for higher quality assets and this has caused us to reduce exposure to corporate bonds where risks are still higher than we would prefer.

Despite the unease in financial markets, we believe that there will be an inflection point, at which time it will be necessary to adjust the composition of portfolios, looking to an eventual recovery in economies and stockmarkets. We are confident that the next metaphorical stockmarket spring will occur and the next phase of stockmarket history will emerge. Patience will be important but volatility has become the longer-term norm for stockmarkets and we and the managers we have selected will be looking to take advantage of the opportunities this provides on your behalf.

Robert Burdett is co-head of multi-manager at Thames River

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