Call me a cynic but don’t you think that Draghi’s pronouncement was neatly timed to allow eurozone leaders and policymakers a week or two of uninterrupted beach time? After all, their summer holidays had been ruined in each of the previous two years.
Now the task of solving the eurozone crisis can resume but the omens are not good. I’m predicting another autumn of violent swings of sentiment in the markets – with Greece again taking centre stage.
This month the troika of the European Commission, the European Central Bank and the International Monetary Fund will announce whether Athens is doing enough to meet its strict bailout terms. But as this edition went to press Greece’s prime minister Antonio Samaras was presenting plans to Germany and France aimed at extending some of the bailout terms by two years. In spite of Greece’s economic depression Germany is not likely to be impressed.
Meanwhile, Samaras’s coalition government is already showing signs of cracking barely three months into its tenure as left-wing coalition partners balk at plans to further cut public sector pensions and jobs.
The outcome of these shenanigans continue to mask an inconvenient truth for the markets: that Greece will be forced to exit the eurozone. As autumn approaches ‘risk-off ’ will again be the predominant market mood and that, as we have already seen, will further depress economic sentiment.
In recent times it’s been fashionable to talk of L, U, V and even W-shaped patterns to describe economic prospects. Trevor Greetham, head of asset allocation at Fidelity Worldwide Investment, has added another, lower-case, letter – m – to describe the short and violent economic cycles that characterise the post-financial crisis world. He contends that we are on one of the downward legs now.
Nevertheless, financial markets are in relatively buoyant mood, ever-expectant of the next round of quantitative easing or other confidence-restoring measures from the US, China or the eurozone. Greetham believes they will be kept waiting. ‘In each of the last few short economic cycles we have needed to see a deep sense of panic before policymakers have been jolted into action,’ he says. ‘With our market sentiment indicator in neutral territory, things may have to get worse before we get additional and potentially cycle-turning policy action.’ Institutional investors also predict the going is about to get tougher. Headlines to recent asset allocation notes to clients have included ‘Curb your enthusiasm’ from Barclays Research and ‘Sunset on summer rally’ from Morgan Stanley.
For investors seeking balance in this challenging environment I continue to see attractions in multi-asset funds such as Troy Spectrum, Fidelity Multi-Asset Strategic, CF Ruffer Total Return, Newton Real Return or Investec Diversified Growth.
Gold, my other safety-minded suggestion, is holding above the $1,600 an ounce level, although it remains well shy of its $1,911 peak in September 2011. Among equity markets, however, cheap Japanese shares remain just that, although investment trusts such as Prospect Japan and Baillie Gifford Shin Nippon are successfully converting value into meaningful gains.
Investors should also consider going off-piste into assets that are not closely correlated to bonds, equities or commodities (but not bamboo, green oil, carbon credits, and other dubious schemes).
Niche closed-end investment companies are a good place to start: such as CATCo Reinsurance Opportunities. With the shares at 98 cents, this London-listed ‘retro’ insurer is trading on a small premium of 2 per cent. Barring exposure to more than two extreme natural disasters in any 12-month period, it should be able to generate a double-digit return, but it is also committed to making an annual distribution of Libor plus 5 per cent of its year-end net asset value (NAV).
Another suggestion is listed timber funds. Oriel Securities has recently upgraded its view of Phaunos Timber (PTF) and Cambium Global Timberland (TREE), the two UK-listed timber funds, from ‘negative’ in May to ‘neutral’. Tom Tuite-Dalton, an analyst at Oriel Securities, says: ‘We retain our cautious stance on the sector, and we expect fees and expenses to remain an issue for the two funds, but given the significant widening of discounts, we have upgraded our recommendation. PTF now trades on a 52 per cent discount and TREE trades on a 39 per cent discount to last reported NAV.’
Infrastructure vehicles such as International Public Partnerships and HICL Infrastructure are also worthy of closer attention, particularly for income seekers, despite their current hefty premiums.
These suggestions are less correlated to financial markets – particularly equities – but are not without risks. But then there are very few safe havens these days.