A happy holiday or sum of all fears? Ignore the short term - invest in the long term
School’s out, holidays have started and already the City seems quieter. Has there ever been a year when so many are looking forward to their break, and so many ready to disable their office email on their smart phones? No showing off how important you are this year by needing to check your emails each day – just group ostrich behaviour as everyone is happy enough to stick their head in the sand and hope it all goes away.
I don’t think I have ever known such a time when short term news fears have had such a broad effect. I suppose to an extent it is quite understandable when you consider all the most recent events. From the horrific slaughter in Norway to the Chinese high speed train fatalities, from the political strapping around the future of the Euro to the political shambles that is being played out in Washington. This really is the stuff of the Summer poolside ripping yarn – but sadly it’s not fiction.
However the headlines are there to scare us all - after all, that’s how you sell newspapers - but we should look beyond the bold type and look at the bigger picture as to what is going on.
Only three years ago we had a huge financial crisis and although everyone seeks to find the secret of alchemy and find a sure fire way out of our problems, the truth is that there is no easy or swift solution. From a decade of fat, we now have a decade of lean. The good news is that we are at least three years into the dire decade. The bad news is that we still have many issues to address and problems to suffer. I have mentioned before the excellent tome by Reinhardt and Rogoff who soundly argue that financially driven recessions have far longer periods of recovery than any usual economic turndown, and thus we are following a well written and troubled course with still some time to run.
Leaving aside the unpredictable actions of Norwegian neo-Nazis and other appalling zealots of any race and religion, and leaving aside the political machinations of certain unpredictable leaders from North Korea, to Libya and Venezuela, to name a few, the economic situation is still dire in key areas of the globe.
Now - time to take a step back. Three years on from a near financial meltdown, the global economy is growing, and growing at quite a pace as the world rebounded from the depths of the recession. Now we are in the next stage of the decade where we will still see growth, albeit lower and slower, and as we can see already, it will be neither evenly nor smoothly spread around the world.
So what is likely to happen? The banking crisis has yet to be fully addressed, and the underlying problems often still not resolved. It is not as simplistic as just utility versus investment bankers as sins were committed on all sides, including politicians and regulators. Nor is it just an issue about capital despite all the discussions around Basel III, but far more about trust - which is at the core of any banking system. This is the trust of clients depositing money with their bank and the trust between the banks themselves. Once this is lost then, as we all saw three years ago, the liquidity and flexibility in the money markets evaporates faster than any droplet of water in the Sahara.
The current concern over sovereign lending has almost diverted attention away from this as many have been looking at sovereign risk, when of course we are in fact dealing with those who hold the debt - and that brings us back to the banking risk. Nor is this just a Eurozone issue as some shallow politicians would have us believe, but rather the integration of the banking system means that this is a global function – or in this case potential dysfunction. Oh and speaking of misleading views, the doom that surrounds any mention of Ireland seems to ignore that GDP expanded by 1.3% in the first three months and that with their manufacturing base and benefitting from a reduction in debt costs, that there is a good chance that they will be able to grow their way out of the bog.
The US debt issue will not be resolved any time soon, nor will the Euro question, but that in itself does not mean a disaster. Patching up will delay the issue until after the election and short term punters will rush around in a state of excitement – but actually what will probably happen is that as the politicians go on holiday we will find that the economy will actually carry on rather well without them.
As for us in the UK? Our growth figures are weak but reflect the global malaise of the lower, slower world but I have been encouraged by the “below the line” entrepreneurialism that I have been finding around the nation. It will be a long haul but one that will recover – only another seven years to go! There are more initiatives that can be carried out in the meantime, but the main issue must be to ensure that the people have confidence that things will be getting better, albeit slowly.
So for us all as investors – do we head for hills clutching our coin and trove, and find a deep cave in Wales to hide in? Well if you think we are heading for the end of the world as we know it, then cave decoration is for you. If, however, you feel that despite all the fears, we will muddle through again, then there is one tried and tested solution. It is to ensure you are well spread across all assets across the globe. Some will do worse than others and some will show their strength but, just as we saw in 2008, broad diversification did work.
Thus my direction for the Summer is not to panic at short term fears, but to look through to the medium term with your diversified portfolio and enjoy a bottle or two of Provence’s finest.
So remember the incantation of JK Galbraith when listening to any punditry and especially to any pompous gits in red braces – 'the only difference is between those who know they don't know and those who don't know they don't know'.
Quote of the week – commenting on the bail out plans “is this not just more Quantitative Greecing”.
And failed joke of the week – “As production of Taramasalata and Humus is halted in Greece, fears of a double dip recession have increased.” No-one laughed and so I slunk off.
And finally......a worrying story from South Africa. A 50-year-old South African man woke up inside a mortuary over the weekend and screamed to be let out - scaring away attendants who ran off, thinking he was a ghost. His family presumed he was dead when they could not wake him on Saturday night and contacted a private morgue in a rural village in the Eastern Cape.
He spent almost 24 hours inside the morgue. The man - whose identity has been withheld - was treated in hospital for dehydration – which I would have thought that was the least of his concerns. Surely he is never going to sleep soundly ever again. Helpfully, officials have urged the public to contact doctors or the emergency services so they can they can pronounce someone dead before calling an undertaker.
"You begin to ask yourself how many other people have died like that in a morgue," said an official.
No I don’t. Frankly it is the last thing I want to think about.
"We need to [get] the message across to all South Africans that it is very wrong for them to conclude on their own that a person has died".
Yes, please do. Note to self: never drink too much and oversleep in South Africa.
Have a good week.
Justin Urquhart Stewart Director Seven Investment Management Limited
P.S. Many thanks for all the good wishes I have received following my recent operation - they were much appreciated.
P.P.S My thanks also to my talented young colleague Ben Kumar for stepping in at short notice to write the column last week.
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