2010 was twitchy, and we should expect more of the same twitching of markets through 2011, as we look for answers to three key questions by the end of the year:
– is the US recovery self-sustaining? e.g. no longer in need of extraordinary Government support and record low interest rates
– can China contain its inflation and property boom, with a “soft landing”?
– does the eurozone now have a realistic, long term, solution to its problems?
If the US gets its act together, it will add new dynamism to the world recovery. Equally if the economy starts back-sliding, expect more “shock and awe” initiatives from the Federal Reserve.
If China can engineer a moderate slow down, large parts of the world economy, increasingly dependent on China, can breathe a sigh of relief. Not being answerable to an electorate provides considerable flexibility.
If the EU can reform the eurozone, a significant risk to the world’s banking system will be removed.
These are three big “ifs”. The answer for the Euozone will be within weeks. Spain has bucketloads of debt to sell in April, and unless some solution is found to current problems by the end of March there is trouble ahead. France and Germany are cobbling together a deal – but will the other members buy into it? The most positive sign is that Goldman Sachs have recommended buying European banks – although Goldmans are the Great Satan to many, they are probably also advising key parties in Europe, and closer to unfolding events than many.
China has just raised interest rates again, as previous attempts to take the steam out of their economy haven’t worked. To succeed might require a “surprise” larger increase in interest rates, and global markets, equities and commodities, will respond negatively.
But if these three issues can be resolved through 2011, the debt problems of much of the developed world could be gradually controlled by continuing economic recovery and growth, moderate inflation, and selective debt defaults (e.g. Greece and Ireland). And the remainder of the world, particularly Asia and emerging markets, can continue on their long term growth path, with occasional cyclical interruptions.
We live in hope. But living in hope is not an investment strategy. So the balance of portfolios must reflect these risks as we enter 2011. Therefore in the latest edition of the TopFunds Guide we focus on where long term trends are in our favour, ideally where there is also obvious value, and also on funds with limited risk. Email back to order your copy. If you have already requested a copy, they are in the post today, 1st class.
