One thing is sure: fixed-income securities look a safe haven
Saturday 05 September 1998
As a curtain-raiser, Capital International, the leading US fund manager, told professional investors present that its planned presentation had been torn up. Worrying, you might think. Actually, it was a remarkably comforting experience.
The nub of its bullish argument was that the Goldilocks scenario in the US remains intact. The thrust of this is that the US is moving into a budget surplus. Treasury bonds, currently in strong demand, could become in short supply if the US government is repaying, rather than creating, government debt.
What is more, American bonds do not look bad value on anything other than historic comparison. Inflation at 1.5 per cent seems in little danger of rising, so the real return is around 3.75 per cent, rather higher than for UK gilts if you assume we suffer a modest risk premium. A buoyant US bond market is likely to do equities no harm.
It is true to say that the US is better insulated against external economic pressure than almost anywhere else. The worry for investment managers is if the American economy turns pear-shaped and we all suffer.
The professionals' view on Russia was also interesting. We all worry about the lack of government, the inability of the authorities to collect tax and the heavy influence of criminal element in the economy.
They pointed out that the most important source of foreign exchange to Russia is oil. Witness what has happened recently. If you take as a broad yardstick an extraction cost of around US$12 a barrel, the effective profit they are making on this important commodity has dwindled to close to 10 per cent of its previous value. All very frightening.
Add to that the knowledge that other commodities - also falling in value - make up the bulk of Russia's exports, then it seems little wonder the country is in the mess it is. It doesn't help you make money, but at least it explains why things are as tough as they are.
Of course, no investment manager - even one dealing exclusively with professional investors - is interested in talking the market down. Still, I did draw comfort from the reasoned arguments they presented. It may not make me rush into the market, but it certainly helps me from panicking. Who knows, it may even be right to buy emerging markets soon, although there was little comfort to be gain from their view on South-east Asia.
The global market-place has become a phrase much bandied-about, particularly as the problems in Russia have deepened. The Russian Premier was only being realistic when he said that the clock cannot be turned back. One side-effect of this is the considerable volatility we now have to suffer in markets.
Trying to change the situation artificially - as we see happening in South-east Asia with exchange controls in Malaysia and government intervention in the stock market in Hong Kong - is unlikely to do any good in the long term.
So we approach the autumn with a degree of nervousness - not unbounded but remaining until we have some real evidence that the turmoil in those markets outside Europe and North America is not damaging growth prospects too deeply. At least buyers are emerging on bad days, from which we can take comfort. One thing seems certain though, fixed-income securities, both in the UK and the US, look a safe haven at present.
Brian Tora is chairman of the Greig Middleton asset management committee
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