Investing In An Uncertain World

In my last article I pontificated about the idea of selling in May. Had the advice been followed on the 1st May then individuals invested in the FTSE 100 would now be 7% better off. The question everyone is asking now however is just how scary is the European situation?

The answer in my view is very scary indeed! Many believe the European common currency is a triumph of political dogma over economics, doomed to fail 10 years ago- it’s a miracle it has lasted this long. The fundamental problem is that Germany is much better at producing and exporting things than the rest of Europe. Germany benefits hugely from the Euro as the currency value is a composite of: at the one end Germany’s strength and at the other end Greece’s weakness. This means Germany continues to sell it’s wares throughout the globe at knock down prices whilst poor Greece cannot attract any holiday makers due to the cost of living. The rest of Europe suffers with an over priced currency due to Germany’s strength.

The ECC also has the fundamental problem that there is no central fiscal and taxation enforcement procedures so many of the wealthy in southern countries continue to view tax as an unnecessary burden and as the ruling class they have no incentive to implement the structural changes necessary to improve the finances of their countries. Again whilst the Europeans show no signs of moving towards fiscal unity there cannot be any long term satisfactory outcome for a single currency.

Finally many European banks are in difficulty. Here in the UK we have been following an austerity package to bring down our national debt however at the same time our banks have been gradually improving their balance sheets. UK banks are not “out of the woods” yet, but they look very much better than many of their European counterparts. So for instance Spain has a much lower national debt than the UK but hasn’t got the wherewithal to support all of it’s banks should then admit they are unable to meet their capital adequacy requirements due to the massive Spanish property bad debts.

Looking ahead what option does the investor now have? The entire thrust of government action for the last 4 years and probably for the next 4 years will be to encourage spenders at the expense of savers. If governments can control public spending then they desperately need people to spend not save (or repay debt for that matter) because the non government sector of the economy will be the only area for growth and if you want to get rid of government debt the
best way to do it is by generating inflation and growing the economy.

If you don’t need your money therefore you may well get a better return in terms of income and the potential for growth (if only to allow for inflation) from real assets. All growth will however be at best modest so the costs of your investments are crucial. Who knows if the volatility of asset backed investments will prove to be worth the extra returns. Cash however is losing real value at a rate of 2 to 4% each year so investors have the dilemma of guaranteed losses on the one hand (cash) versus potentially much greater losses and / or much better gains from asset
backed funds.

I welcome any feedback or suggestions for a future article, you can contact me at andrew@swallow-financial.co.uk or by phone on 020 7182 4474.