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Market commentary: March 2013

By March 8, 2013No Comments

SUMMARY. As if there wasn’t enough complexity already, new features emerge. Currency wars, which could just be profitable for investors. And voters beginning to take charge of the asylum – which is dangerous.

P.S. If your ISA isn’t in place for this tax year yet, please do get in touch ASAP.

It is time to catch up with some new, key trends.

Sterling is weakening noticeably, as you’ll know from the headlines. We thought this might have occurred sooner, but through much of 2012 money was flowing into the UK, in particular fleeing the euro crisis, which underpinned sterling.

The opportunity for UK investors is not weakness against the euro, but rather against the US dollar.  The US dollar is fundamentally strong (at least for the foreseeable future) as global reserve currency, and the world’s safe haven.

Technical indicators also imply a long term trend change for sterling, with parity vs US dollar implied as the final destination.  Just buying dollars and stuffing them under the mattress would do the trick if sterling fell that far.

In Japan, since the election In December, there is an overt policy to get the yen down.  This is part of the plan to get inflation up (reduce debt in real terms), boost exports, and boost economic growth, after 23 years of doldrums.  It is very early days, but the early signs are encouraging (if you are the Japanese Prime Minister).

These are the early moves in the currency war of which you have heard so much.  It creates a new dimension to the complexity of an already risk-infected world.  How will the Koreans (who also rely on exports) respond to being undermined by Japan?  Similarly China, which was already sabre-rattling over the Senkaku islands?  UK relations with Europe, already strained, will get worse.  UK voters are showing mid-term disquiet in the shires.

The Italian voters are positively revolting.  The warm words of ECB boss Mario Draghi 2012 (“I will do whatever it takes to save the euro”) marked the end of the beginning of the eurocrisis, and since then complacency has set in.  Now the extraordinary Italian election result gives a glimpse of the beginning of the end.  The European authorities continue to buy time, coupling great resolve with extraordinary imagination.  But the time is not being used to find long term solutions.

As such, the political elite are allowing their worst nightmare to unfold, the voters taking control.  Beppe Grillo is a joke. Yes?  Think again.  His promotion of “direct democracy” is a quiet revolution that could light up like a prairie fire.  He says “I don’t know if we should be in the eurozone, even if I was Prime Minister.  Everyone should decide through a referendum.”

The US is not immune. One Princeton professor highlights how mistrust is growing amongst US voters because the leadership can no longer explain how the financial system works. They feel like victims of fickle politicians, and are prepared to explore the political fringe for answers.

Investors can exploit the currency wars (as we set out in the recent TopFunds Guide), but be wary of unfolding political trends.

Dennehy Wealth