Thank heavens calendar years always follow exactly the same economic and investment path otherwise – and just as the S&P 500 was recording its seventh best start to a year since 1928 – we would not have known to start selling out of equities ahead of whatever Really Scary Thing is about to spoil all the fi rst quarter’s good work
Not that I am suggesting such caution is unwarranted. Lord knows, there is a veritable axis of evil of potential catalysts for global economic meltdown waiting in the wings, of which Iran’s nuclear ambitions, the US defi cit and anything connected with the euro are only the most familiarly depressing. Substitute the implications for the oil price of military action against Iran with the implications for the oil price last year of the Arab spring and one can certainly see why it feels like déjà vu all over again. But of course that is the problem – feelings and investment go together like alcohol and driving, in which context some thoughts from M&G fund manager Steven Andrew, whom I know I am quoting twice in two months, er, feel rather apposite. “How we think we make decisions is not really how we make decisions,” he explains. “We love to be able to justify intelligently why we did something or why something happened but behavioural psychologists Amos Tversky and Daniel Kahneman came up with rigorously tested behavioural conclusions that people just make decisions based on how they feel. “So the volatility of equities in recent years has not been a very nice experience and that makes us disinclined to engage with them again. We may construct a story as to why that might be a valid, intellectually robust course of action but that would be entirely false – that is not how we make decisions.” So let us end on a genuinely more intellectually robust note, with Schroders’ chief economist and strategist Keith Wade arguing that while there are some similarities between now and 2011, “the prospects for risk assets are more fi rmly based”. “The commodity shock is not as great as last year as oil prices have not risen as rapidly and food prices are down,” he observes. “Furthermore, policymakers have acted to support growth with the European Central Bank in particular containing tail risks through the provision of unlimited term liquidity to the banks. Meanwhile, Greece has received a second bailout. “There are still risks to the outlook with tensions between Iran and the West, and we still doubt whether some of the peripheral eurozone countries will be able to meet their fi scal targets. However, global growth expectations are one percentage point lower with the eurozone GDP forecast 2.5 points weaker, according to Consensus Economics. “Peripheral bond spreads are wider and the equity risk premium is considerably higher than 12 months ago while investors and economists are cautious – probably a better basis for the markets to withstand whatever the world economy has in store compared with 2011.” Investor caution – won’t hear a word against it.
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