Elements IFA - Female Financial Advice, Financial Advice for Women

The phrase I have previously used was that “complacency was the smile of fools” – and last week that complacency was finally shattered as a series of events unintentionally conspired to shatter the alabaster smoothness of the global investment markets. The catalyst may have been the shudders of Chinese stock markets which despite the economy being the fourth largest in the world, in fact only accounts for a mere 2% of global capitalisation, but the underlying causes lay elsewhere. There is almost a menu for one to select a suitable culprit, for example some have blamed the apparently contradictory statements between the former Fed Chairman Greenspan and his successor Ben Bernanke. What they actually said seemed almost a side issue compared to how they became interpreted. Greenspan repeated in Japan the possibility of a US recession later in the week, and although he may be correct, the current Chairman must be somewhat fed up with his predecessor bleating from the sidelines.

Perhaps though the trauma was caused by the fear of a credit crunch with the government of Ecuador openly threatening default, or maybe a realisation that the private equity tribes of “barbarians” had bitten off more than they could chew with the $45 billion buy out of the TXU power generator using apparently up to 80% gearing! Another reason could be the contagion of the sub prime “trailer trash” US debt where 22 firms have recently gone into liquidation in the US only to add to further pressure for the HSBC position in that market. If this contagion were to spread to the better quality housing market then that would be a far more serious concern for the US economy and thus a far more serious concern for the rest of us as well.

There is also the further systemic question of the “carry trade” where money is borrowed cheaply in one centre (often Japan) and lent out in another. Just a modest rise in the Yen and some weakening emerging market currencies will have made many in such investments considerably more nervous. All these factors will have contributed to the nerves in some way, but it has been the sudden change of sentiment that has been most noticeable – the glass was half full – now it is half empty.

Perhaps there is a growing realisation that, as I have somewhat tediously bored on about before, if the world’s brakes are being applied, then in all likelihood the global economy is likely to slow. Thus if this occurs and the US economy does cool, the ramifications are there to be seen, and it would be the knock on effect to those nations who will feel the pain resulting from slowing demand for outsourced manufactured goods and/or the underlying commodities – either way it is the emerging nations who are at the wrong end of the food chain in these circumstances.

Such an impact to an extent may have already been noticed in some major companies whose involvement in commodities is fundamental, and thus it has been the miners that have been affected and certainly added to the nervousness in the FTSE 100 which rarely on one afternoon last week continued to fall despite a Wall Street rally.

So where does this end? The answer sadly is not quite as finite as one would wish, but it will come about as economic indicators show us a clearer path either towards a gentler slow down and “soft landing” or something more unpleasant. It could be possible thus to pontificate about the summer slowdown resulting in potential autumnal US rate cuts which could point to a very slow recovery? But that as yet is just idle and optimistic speculation.

This then is the time for your investment portfolios to have a proven and broad range of both geographical and asset diversification to provide as much spreading of risk across increasingly thin ice. I think we should also be aware that in times of nerves there can be some asset class “correlation contagion” (as it did last May) when previously uncorrelated assets started to behave in a similar manner. This is normally driven by fear of losses and thus investors sell all that they can including the “good stuff”. Hold hard and don’t panic!

The Bank of England MPC meets again this week and after the split vote of last time I think there is likely to be more unanimity this time around for a “steady as she goes” vote to see what impact their previous hikes have had. What is going to be most important will be the acceptance or otherwise, of the proposed state related pay levels which at present seem to be very close to the Chancellor’s intentions, but I suspect not anywhere near the expectation of the recipients. We might yet see a “stroppy Spring” from certain unions.

And finally… for those who are enthusiastic players of golf, may I recommend that a Chinese golfing trip may not be the wisest move at present. The authorities there are taking a somewhat dim view of this sartorially challenged sport. Apparently various senior officials have been caught taking bribes in the form of golf club memberships. The game is seen as being both elitist as well as environmentally unfriendly because of its use of pesticides and fertilisers, and it also takes away valuable farmland. Golf is now referred to in official circles as the “green opium” by way of an historical reference to the pernicious British import to China of opium in the 19th century that became the cause for two local conflagrations. In order to camouflage such behaviour, addicts of this stick waving behaviour have taken to being given restaurant receipts instead of golf receipts to cover up their green fee habit. I always knew there was something suspicious about golfers.