Recognising growth markets

It is the sc ale of countries’ economies and their growth that matters for investors’ wealth preservation not simply the sc ale of the press headlines their problems produce.

Let us imagine such a scale adjusted headline: “Greek economy collapses, Greek GDP falls to $0. Resulting loss of value is equal to 4months growth of GDP in China.” It is the lack of a sense of proportion that, we believe, is creating a huge distortion effect on investors’ priorities. Get your sense of proportion correct and you will see the world as it really is. To act on this different perspective you must look east, but you may need to invest west to do so in a well informed way.

Market Uncertainty

Events during the last week, which saw global equity markets fall by over 10%, have contributed to investor uncertainty. This was most evidently marked by a downgrade of US Government debt by Standard and Poor’s to AA+ from AAA.

Greater problems for the markets, however, stemmed from the Euro area and the perceived need for the European Central Bank (ECB) to buy Italian and Spanish bonds. These concerns over government bond markets seems to be sending investors in the direction of what they saw as “safe haven” investments such as gold, the price of which reached a record in excess of $1,700 per oz, and also into Swiss Franc deposits and US government bonds.

Both the US and Euro area issues have shown considerable weakness in political decision making processes which has reinforced the sense of uncertainty and concerns over growth prospects. It can be hoped that the Euro area will develop the institutions necessary to run the Euro area but the fundamental problems created by the different economic performance of euro area countries within a single currency area, will continue.

In the US the downgrade of Federal Government bonds may however have significant indirect economic benefits for China and the USA. China, having dealt with problems of its export led growth policies may begin to focus more on domestic oriented growth. Greater emphasis placed on Chinese consumption resulting from a rising Renminbi / US$ exchange rate would be very positive for the world.

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