AND so the curtain falls on a torrid quarter for risk assets: stocks, commodities and high-yield credit have all fallen sharply since mid-year, by around 15%, 9% and 8% respectively.
The big sell-off in stocks was concentrated in early August, and led by the euro area, particularly Greece: since then, the big markets have been broadly directionless, though volatile. Emerging stock markets have performed just as poorly – indeed, slightly more so – than developed markets.
The 10-year US Treasury note, meanwhile, looks set to have delivered a total return of around 11%, with bunds and gilts close behind. Gold also surged, but has since given up most of its gain. However, it wasn’t only safe-haven assets that performed strongly – not that we think of gold that way ourselves: the 10-year Irish gilt rallied to deliver a return of one-third since June 30, alongside a loss of one-fifth for the comparable Greek bond over the period.
Taking all this into account, we are cautiously optimistic that markets will stabilise during the fourth quarter.
We do not expect investor scepticism about euro area sovereign debt, and the region’s banks, to disappear. Euro politicians will continue to speak with many voices, and to play granny’s footsteps with voters over fiscal integration, for the foreseeable future.
Germany’s ratification of the enhanced European Financial Stability Facility (EFSF) reassures, but is not game-changing in this respect.
Meanwhile, the trillion-euro “TARP” (Troubled Asset Relief Programme) reportedly framed at last weekend’s G20/IMF meetings has yet to materialise. Attention has now shifted back to Greece, and to the disbursement of the next tranche of the already-agreed first support package and the finalising of arrangements for the second – and if one or both of those fail, and formal default ensues, it will shift to the credible ring-fencing of Greece that will be needed to prevent contagion spreading.
However, investors may become reconciled to this piecemeal process, and we are optimistic that the rally in Irish gilts – and to a lesser extent the ECB-fostered stability in Italian and Spanish debt – is telling us that markets are perhaps becoming a little more discriminating. Ireland’s economy is very different to Greece’s, and its fiscal response has been faster and more credible.
Investors’ nerves may also be steadied if the recent run of slightly less fragile data in the US continues. The last week has seen some two-way traffic in economists’ estimates of near-term GDP growth – the first in a while – and our take on consumer spending in August is that it was encouragingly resilient, given the backdrop.
In this context, we continue on a three- month-plus view to recommend holding both more cash and developed equities, and fewer bonds, than usual. In abstaining from trying to call the shorter-term gyrations in markets we are heeding the warning of our Behavioural Finance team against over-trading. Volatile markets seem to call for more active allocation, but in reality – particularly for private-client portfolios – the best advice is often to take a longer-term view and stick with it.
:: Andrew Miller is regional office head of Barclays Wealth in Newcastle
