Thursday, 31 May 2012

Olympic torch: Rob Burgeman tries to stay positive

As the Olympic flame circumnavigates the country, the mercury in the economic and political thermometer has risen perceptibly over the last few weeks. Assets that are perceived to be “Risk Free” (I use the quotation marks here deliberately – no asset can be classed as risk free) such as Government Bonds and, in particular, German Government Bunds have seen returns fall to unprecedented levels.  By way of example, a two year UK Government Bond currently offer a gross return of 0.26%, while a two year German Government Bond will provide a gross return of just 0.02%.  It seems, therefore, that investors are happy to see a potential negative return after allowing for tax and inflation in the expectation that they will, at least, get their money back.

Indeed, there seem to be significant threats everywhere at the moment. A messy Greek default followed by a meltdown across the peripheral eurozone is, of course, the concern on everyone’s minds at present.  However, a hard landing in China leading to wider problems across the resource belt (ie Australia, Brazil etc.) cannot be entirely ignored, unlikely as we think they are.  Iran, Pakistan, Afghanistan and instability across North Africa after the Arab Spring are also issues that could rear their heads over the remainder of 2012.  And that is before we begin to consider the “unknown unknowns” as Donald Rumsfeld used to say.

However, for major blue chip companies, while the wider economy in the UK and Europe is important, the real growth is coming from the emerging world and Asia.  As we saw at the back end of last year, solutions – temporary or otherwise – can be followed by rapid market movements.  One can see, already, that while markets have pulled back from recent highs, it is very far from the kind of hysterical collapse portrayed.  Moreover, quality companies with robust balance sheets and progressive dividend policies have shown themselves capable of surviving some pretty fierce tempests over the last hundred years or so and, provided that one’s investment timeframe remains appropriate, it may not be prudent to advocate widespread selling of investments at these levels.

Let us hope that the light from the Olympic torch will dispel some of the current gloom over the weeks ahead!

Rob Burgeman
Divisional Director

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