The views expressed above are based on information which we believe to be reliable, but are not guaranteed as to accuracy or completeness by Principal, and any expressions of opinion are subject to change without notice. This article is for information purposes and should not be treated as advice to buy or sell any particular investment.
Uncertain markets - 4 August 2011
04/08/11
Despite agreement being reached on raising the government’s debt ceiling in the USA, markets have continued to fall in recent days. The debt ceiling is usually a technical issue and is raised regularly, without normally being commented on by the outside world and in common with almost everyone else in the market we always expected agreement to be reached, to prevent the US Government having to default on its obligations. However political brinkmanship caused the stakes to be increased well beyond comfort levels last week, fuelled by the relatively unusual situation of different parties holding majorities in the House of Representative and the Senate.
Although crisis has duly been averted, the protracted debate has served to focus attention on the rapid growth in the US deficit, and the apparent lack of a plan to bring it back to normal levels within a measureable timeframe. This has been an unwelcome reminder to markets of the fragility of sovereign budgets in the developed world, following so quickly on the deal to finance Greece’s debts that addressed Greece’s immediate crisis, but did little to resolve long term structural problem in the Eurozone. Indeed it is now evident that the deal has not arrested growing worries that the much bigger economies of Spain and Italy may also need external help in financing their deficits. Meanwhile economic statistics continue to suggest that economic growth in the developed world may be slowing from the levels of the last year, potentially putting further strain on government finances.
Hence the weakness of recent days. We expect nervousness and volatility to persist. However we are also aware that the timetable for the raising of UK interest rates seems to have been deferred, that company results are still tending to surprise on the upside, and that corporate cash flow continues to improve. Valuations and dividend yields also look attractive in comparison with other asset classes as long as we do not experience a credit shock similar to that of 2008/9. So we feel that strong nerves may indeed be needed in the coming weeks, but they are called for at this moment.
by Richard Cumming-Bruce BA SIE (Dip), Senior Investment Researcher.
