January saw a great start to 2012 in terms of financial markets and the optimistic start has been maintained.  In light of this I thought it was worthwhile catching breath and looking at the overall situation and the immediate future.

Last year was dominated by the Eurozone crisis and the crippling sovereign debt burden.  As a result of the numerous failed attempts by politicians to take control in a co-ordinated and convincing manner investors became nervous and took extreme views on both equities and bonds, including Gilts.

 

So what has changed?  In truth, very little.  The massive debt burden is continuing to grow and the politicians continue to vie for position within the European community. 

 

There is however one subtle change and this is giving investors more confidence. The markets are starting to believe the politicians are finally aware of the severity of the situation and the rhetoric is being replaced with a co-ordinated approach to come up with a plan.  At the same time the European Central Bank has provided increased liquidity which has then enabled the various national banks to catch their breath and defer any drastic action.

 

This modest change is a start.  The recovery will certainly be a long, and painful, process. There are no real comparisons in terms of the road ahead and past experience, but small tentative steps in the right direction will continue to give investors reasons to plan ahead.

 

As the Euro countries adopt the new debt and spending rules of the treaty anticipated in March, markets will hopefully continue their recovery, although there will likely be some dramatic falls backwards along the way.

 

The fear of a disorderly default by one of the Eurozone countries on their debt, combined with the fear that the Euro may fall apart in an uncontrolled and chaotic mess, will continue to cause uncertainty and volatility. 

 

However over the longer term I feel we will see markets return to some normality.  Looking ahead I think asset classes will revert to a more balanced and familiar format.  For example Gilts funds have done extremely well over the past year but these will probably fall back a little going forward.  The chief beneficiary of the reducing demand for Gilts will be equities and corporate bond funds within the UK, US and some emerging markets.

 

As always, our focus remains longer term and the outlook remains fairly buoyant as current stock market valuations appear undervalued in many cases, giving the right investment fund manager’s opportunities to benefit from any stock market recovery.  

It is important to take an approach suited to your needs and attitudes which is where we can help.  If you would like to discuss the situation further please get in touch.