3rd Quarter Market Commentary
Tiedemann Wealth Management
By Team
October 31, 2011
Despite the ongoing debt crisis in Europe, the news is not as grim for investors as it may seem. At Tiedemann Wealth Management, we believe that markets have more than discounted the risk of European recession as fallout from this crisis, which an inept political system has exacerbated. It marks the first time in many years that markets are questioning political leadership in developed world nations, something they normally only consider when investing in emerging markets.
Moreover, we do not believe that the G-20 leaders will allow a major counterparty bank to fail, despite their apparent lack of coordination over the past few months. Our contacts in Europe, who are very close to the situation, strongly support this view.
The result will almost certainly be a managed, orderly default on Greek debt, structured to prevent contagion to other weak markets. Such a managed default could be the cathartic event European markets need to move forward—provided that those policy-makers are able to contain any further issues with countries such as Italy and Spain. If so, then the system should remain intact, although challenged by a muted growth environment.
Although equity and fixed income markets may have been volatile in response to the European crisis, they have not been taken by surprise, as they were in 2007/2008. This time around, traders and investors understand clearly the magnitude and complexity of the problems in the system. Leverage in the global financial system is also considerably lower than it was four years ago. Consumer balance sheets and savings rates have improved strongly, and corporations have built substantial cash positions, which they will use to make acquisitions at the first sign of stability.
Positive momentum?
The investing community, as well, now operates with far less exposure and leverage than it did entering 2008. Virtually every money manager we know or with whom we invest has elevated cash levels. At the first sign of stability, we expect that cash will swing from an asset to a liability as it dilutes performance and mutes participation in any rally. The inevitable re-investment of that cash potentially will create a strong positive momentum, especially if corporate M&A transactions and share buy-backs follow.
Meanwhile, our portfolios continue to focus on global, higher quality companies with strong cash flow and securities that distribute cash to their holders. We believe that these assets will particularly benefit as yield-hungry pension funds and insurance companies rebalance away from existing treasury exposures over the next few months.
We also are maintaining our exposure to commodities, despite their volatility. We recognize that tightening measures have slowed growth in emerging economies over the past year, but they do continue to grow. Moreover, unlike in 2008, commodities are no longer stockpiled, but rather supply-constrained or at least far more balanced than they were three years ago. We therefore believe that the long-term commodity cycle remains intact. In addition, since the Federal Reserve indicated that it plans to keep interest rates low for the foreseeable future, Gold will continue to benefit, particularly as investors no longer completely trust developed country currencies.
(c) Tiedemann Wealth Management
