There are Still Strong Reasons to Consider Equities
As every other commentator will probably mention it, I feel I have to start by saying that 'now that the Olympics are over' markets can get back to 'normal', whatever that is.
Whilst the UK has been in a happy frame of mind recently, there is no getting away from the fact that the economic environment is getting no better. In fact, it might be about to get a lot worse.
Mervyn King has indicated that he expects the UK economy to see no growth for the remainder of 2012. This will leave any company that is struggling with a debt situation in a bit of a hole, to say nothing of the prospects for this year's graduates.
Oddly enough, the stock markets seem completely sanguine about the situation, with the UK and US indices at the top end of their 2012 ranges.
On top of this, the German DAX, which is in the middle of a massive Eurozone crisis, has actually risen by some 20% since the end of 2011.
The overriding question is whether these prices actually sensible, or are we in Cloud Cuckoo Land?
For all of the doom laden scenarios from the more excitable commentators, there are still strong reasons to consider equities above other forms of investment.
The essential point about today's global markets, in relation to asset allocation, is the potential mobility of corporate earnings, Head Offices and the legal responsibility of Board Members.
If 'XYZ Government' decides to solve its deficits by taxing companies more, the wizard accountants can arrange matters so that profits miraculously disappear from XYZ and appear in ABC.
The company can move its listing from one jurisdiction to another and, in extreme cases, could even shift its production.
The problem for holders of sovereign debt is that none of these options are available/applicable.
We are entering a scenario where, even for AAA rated countries, the likelihood of Sovereign default/haircuts must be pretty significant versus the probability of Rio Tinto, for example, going to the wall.
While we can expect a certain contraction in overall dividend payments, the current long-term risk/return ratio seems to be favouring the equity markets.
That said, there is always the chance that a further loss of confidence will drag us down. However, over the past couple of months, our spread betting account holders
seem to have seen every dip as a buying opportunity, rather than a 'panic and exit' scenario.
The information and comments provided herein under no circumstances are to be considered an offer or solicitation to invest and nothing herein should be construed as investment advice. The information provided is believed to be accurate at the date the information is produced.
By Simon Denham, 13 August 2012