Bad news has piled on bad news this past fortnight. As the eurozone debt crisis deepened, US politicians faced off in a reckless game of brinkmanship over government spending. Add Standard & Poor’s decision to downgrade the US sovereign rating to AA+ and riots across England’s biggest cities, and it has felt as though investors are under siege from all sides.
Risk assets have garnered little market support because investors are fearful of what their future holds in this uncertain environment. This means that equity markets have fallen by roughly 15 per cent in sterling terms, undoing the gains seen over the past year.
As often occurs in such environments, government bonds have been the refuge of choice. US treasury bond and UK gilt yields have reached new lows and therefore price highs in successive days this week.
To get to the root cause of the deterioration in confidence we need to look past the headlines. We need to put on our metaphorical scuba gear and dive past the surface turbulence.
The first thing to notice is that economic growth has disappointed but anaemic growth across Europe is perhaps not surprising. A deterioration in the pace of economic activity across the Eurozone – with the honourable exception of Germany – is only to be expected, given the well publicised difficulties experienced by many of the continent’s peripheral economies.
Swimming deeper, more concerning is the weakness of the US economy. Revised data released last week showed the US economy grew at an annualised rate of just 1.3 per cent in the second quarter of the year and 0.4 per cent in the first three months of 2011. This is a far cry from the rapid growth one would normally expect emerging from recession.
But the greatest danger to investors is the concern that poor leadership and fiscal constraints in Europe and the US will obstruct a straightforward route back to growth. Uncertainty is the enemy of corporate investment. It is already taking hold, with the latest surveys indicating a deterioration in the outlook for fixed-asset investment – one of the few areas predicted to lead growth in the West into 2012.
It is no surprise that some investors have succumbed to the bends in this environment. However, the key point to remember is that the problems are largely focused in the world’s developed economies.
Although emerging markets are likely to continue to face some liquidity pressures in the short term, over the medium to longer term, we continue to believe that the fundamentals of the world’s emerging economies are strong and that economic growth and therefore corporate profits are likely to be higher than their developed counterparts.
If your time horizon is sufficiently long and you can tolerate the volatility, this could be a good opportunity to tilt your investments towards markets in Asia or emerging Europe.
However, if making assetallocation calls does not appeal to you or you are not comfortable with investing in emerging markets, then the solution could be to look at a multi-asset strategy. They are managed nimbly and offer the ability to dial down risk in troubled times and dial it back up when times are better.
A multi-asset approach can be an effective way to minimise the effect of volatility on your investments and build up your net worth over time.
Ian Pascal is head of marketing and communications for Barings Asset Management