DEATH by PowerPoint is an ever-present danger at strategy roadshows. Audience participation helps keep it at bay.
The first question that can be asked is who thinks the global economy is in great shape? The rolling 12-month response is approximately zero.
The second question is can you name a time when the material conditions of life for the average person on the planet were significantly better than today? Here too the response is negligible.
The point this illustrates is the importance of context and perspective in the investment debate.
Everyone is aware that in some sense the global economy is troubled. At the same time they are also aware that in some other, underlying sense (say the ability to shelter, feed and clothe the average human) it’s really doing rather well.
Investors currently focus almost exclusively on growth and the news here has, of course, been poor.
In the fourth quarter of 2011 for example, UK GDP fell by 0.2% and Eurozone GDP (we estimate) by a similar amount. The US economy grew in 2011 by only 1.7%.
But the level of economic activity is overlooked and the average standard of living is likely still very close to an all-time high.
Sometimes the differing perspectives become very visible. For example first-time visitors to Japan arrive having read about ‘lost decades’ of growth and the country’s large budget deficit.
What they find are startlingly high levels of efficiency, infrastructure and all-round material well-being (to say nothing of general civility).
But if the focus on growth rates becomes too intense, some asset prices can diverge a long way from those warranted by the underlying level of corporate profits or solvency.
To some extent this is what we think has happened of late. The divergence may represent a longer-term opportunity – at some stage those levels may start to exert a gravitational pull back towards more appropriate valuations (though Japan is not alas our favourite investment currently).
Actually, even the growth debate may be taking on a less negative tone. Some important forward-looking indicators in the big developed economies have been drifting higher in the last three months.
In this latest week, we’ve seen key manufacturing surveys in the UK and even Continental Europe beating expectations. If next week’s US ISM new orders index were simply to maintain its prior level, our composite ‘G3’ manufacturing indicator would rebound to the highest level since April 2011 – a quarter of a standard deviation above its long-term average.
Meanwhile, the euro crisis – which is largely and understandably responsible for that short-term, incremental focus – may be showing signs of stabilising in response to the ECB’s massive intervention.
The interbank spread has drifted back down to levels not seen since October, and Italian, Spanish and Irish 10-year benchmark bonds are flirting (positively) with 6%, 5% and 7% yields respectively.
Renewed volatility is still likely. Another EU summit looms and Greece and perhaps Portugal retain the ability to disappoint. Tension in the Gulf remains and the political situation in France is sparking investor questions.
But the positive start to 2012 by risk assets is not without foundation and we continue to recommend that long-term balanced portfolios hold more risk assets and fewer government bonds than usual.
:: Andrew Miller is regional office head at Barclays Wealth in Newcastle
