The United States have developed a new weapon that destroys people but it leaves buildings standing. It’s called the stock market.” – Jay Leno.
2012 became a profitable year for investors in equities. Pushed by their banks however, investors were and are still being encouraged to stick to the same strategies as in the past. This is useful for the banks but not helpful for the investor portfolios which suffer as a result.
The reality is that markets almost inevitably want to see price levels rise as long as there is no logical reason for this not to happen. Left to their own devices, investors, both institutional and retail instinctively need to see growth in their investments. It is only the fears of adverse conditions that get in the way. In time however the upward trend always resumes, even if it takes a while.
In Europe, Greece has effectively been written off. Mr Draghi’s statement that ‘we will do everything it takes and believe me it will be enough’ did not include Greece and probably won’t include Cyprus. Spain is still in a difficult position with its banks, but still has many effective industrial companies but insufficient government effort to encourage growth.
Last week’s decision that the European countries did not want to devalue the Euro is logical; against which currencies would one want to devalue the currency in the first place? The southern European countries (the olive oil or club med states) need to devalue their currency against the northern European states such as Germany, the Netherlands, Finland and Poland, but no-one is (yet) suggesting that the Eurozone be split this way.
Great Britain will have a referendum on remaining in the European Union after the next general election. This was a decision taken for domestic political reasons; 2017 is so far away it could well be in another lifetime and the suggestion could well be ignored by whichever political party is in power at the time. In the meantime, the mere suggestion puts pressure on the remaining Europeans and brings the press commentators into a lather of indignation, all of which can be safely ignored. What is potentially worrisome however is that when Europe negotiates with the USA over a free trade agreement, those areas that are important to Britain such as finance and banking could be sacrificed by the European negotiators at the request of the Americans in order to achieve better positions in other areas. There won’t be much that Britain can do about it.
One should be aware that while some developing countries are growing so fast that they can no longer be truly called developing, some developed countries, such as Greece and Portugal could slip down the ladder in the opposite direction as their economies shrink and political lack of courage and incompetence make them ever weaker.
Where to invest next? The equities of efficient companies, found and analysed by competent analysts for hard-nosed fund managers has to be the next step to an effective investment portfolio.