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Is the economic war over?
Publication Date : 05-01-2013
From the London Olympics through to Queen Elizabeth II's Golden Jubilee, the European football triumphs of Spain and Chelsea, to 50 Shades of Grey, Gangnam Style and the eventless passing of the end of the world warnings, many people are looking back on 2012 with fond memories and also looking forward to 2013 feeling more optimistic about global investment opportunities.
A thick coat of gloss was applied to shabby, tired-looking global equity markets during 2012, giving a real shine to the year end results - markets were up over 10 per cent on average (including the Stock Exchange of Thailand's gains of well over 30 per cent).
However, this has only taken global markets back to just above the levels at which they started 2011, which is also barely where they were at the Chinese New Year shortly thereafter, and some way below the levels of Songkran that year.
This all just looks suspiciously similar to a smaller version of the pattern whereby global stocks peaked at the end of March 2000 before falling by almost 50 per cent in the next two years and then regained that ground over the next four years, making a new peak in 2007 and then tumbling again.
In short, global stock prices are not only below where they were in March 2000 and in April 2011, but they're still hovering around a correction (i.e. 20 per cent lower) than they were in November 2007.
That doesn't mean that there haven't been investment opportunities. There have. Allocations to gold and bonds have helped MBMG to almost double our client's investment values over the last 12 years. Even in 2012 our high-risk themes have yielded returns of well over 30 per cent (mainly from trading gold futures) while our fixed return portfolios made over 7 per cent in the last year in a wide range of currencies.
Even the initial news of the retail sales season seems to be reflecting increasing positivity. There are definitely more smiles around this year and more champagne glasses being raised as, in the background, the first few bars strike up again telling us that this is a "Happy New Year."
Being inherently contrarian, I can't say I'm sharing all this cheer. Nor, for what it's worth, have I ever been much of a fan of The Beatles (John Lennon was always the least Fab of the four as far as I was concerned). And so you can imagine my frustration at being unable to stop his voice constantly and accusingly reverberating over the festive season. Yes John, it's very pertinent to ask what have any of us actually done - the old and the young, the weak and strong?
However, the last 12 months have been frustrating for most investors - especially those looking to achieve better than fixed returns but wanting to conserve their capital. The world's very best risk-adjusted portfolio managers, the most consistent over the cycle and the best at protecting investors against the risk of loss, achieved returns ranging from just 1 per cent to 5 per cent for the final year of the Mayan Calendar.
No wonder, with another year over and a new one underway, some investors are showing signs of frustration, impatience or sheer incomprehension, especially in light of the recent stock market bonanza.
The frustration of the last 12 months is that the boat that the global economy is in looks very similar to the one that seems to have been foundering for the last few years. The economic challenges facing the global economy seem greater than ever; debt levels are higher (and still rising) not lower (and falling) while policy-makers remain in denial (as evidenced by the divisiveness in Washington over the "fiscal cliff").
Yet now, more than ever, a strategic compass is vital. Too many investors have been seduced by the short-term market response to misguided economic policies into holding the wrong assets, hoping that the new year is a good one without any fear.
Sadly, those who are unable to withstand significant capital loss could be facing losing 50 per cent or more of their worth in seemingly inevitable corrections in equity, commodity or corporate bond markets, while investors belatedly rushing into gold or bonds at current levels need to be intimately aware of where the exit doors are located: both assets could have just one more major peak, admittedly a significant one, remaining before entering into a decline that could easily last twenty years.
The unholy war waged by policy-makers who have taken the economy nowhere for the last dozen years is far from over. The truce over Christmas was very welcome but hostilities are resuming in earnest in the form of fiscal cliffs, budget ceilings, ratings downgrades, recurrent euro-zone crises and ongoing political/electoral uncertainty. Until these issues are all resolved, fixed return and high-risk investors are likely to be best rewarded at the expense of the vast majority in the middle of the risk spectrum.
But just when exactly will the end be? Or, in other words, how much farther can policy-makers keep kicking the can down the road? It's hard to say for sure but every year that central banksters and politicians keep delaying the inevitable, then the longer patient investors will have to wait for the opportunity of a lifetime to come around. The good news is that the ultimate reward will very much be worth it for those who are both patient and ready.
Paul Gambles is managing partner and chief investment officer of MBMG Group.