A phrase, or variation of it, that is increasingly used by fund managers is the equivalent of the sportsman’s or politician’s cliché: “cautiously optimistic”. This year they have been describing their investment strategy as being in “conservative risk-on mode”.
It’s not a particularly attractive phrase, and it is more often deployed by equity investors than bond investors, but it accurately reflects the dichotomy at play. On the one hand, a great deal of scepticism remains about a resolution of major problems in key economies throughout the world, which should temper an enthusiastic plunge into markets; on the other hand, the liquidity that has been pouring from accommodating central banks since 2008 makes a leap irresistible.
Investors are mandated to make the money entrusted to them work. Keeping it in cash, earning near-zero rates of interest, would seem irresponsible to trustees and directors, especially as indices climbed higher early this year. Momentum carried them further throughout the quarter, especially some Asian benchmarks, and fundamental investors quickly found value in individual sectors and stocks.
But as our most recent poll as well as regular industry surveys reveal, strong markets are hardly supported by firm confidence about the health of the global economy, or a conviction that policymakers will prevent a Pandora’s Box of economic misery engulfing the world.
The European sovereign debt crisis prints fewer dramatic headlines now, but the underlying problems still fester and their stench might again resurface when the balm supplied by central bankers wears off. Doubts remain too about the recovery in the US, and every other data release from China sends shudders throughout the globe, raising fears of a hard-landing.
A little more than half (51%) of the respondents to our poll about the prospects for the world economy during the second quarter said they expect “continued uncertainty”. That means it could be bad or it could be good; they have no idea really.
Most likely, the world economy will maintain its confusing shape, characterised by a further deferring of those incisive actions demanded by strident commentators who can’t abide a state of limbo.
Alternatively, an indeterminate state might simply have to be endured, until the actions already taken by policymakers prove finally to have succeeded or failed.
Encouragingly, however, there are more sunny optimists than dismal pessimists. As many as 35% of respondents think there will be “continued improvement” in the global economy during the next three months, compared with just 14% who are battening down for a “turn for the worse”.
Perhaps in July fewer than 50% of our readers will be “uncertain” about the outlook for the following quarter. On the other hand, we’re not sure.
