This comment is not from any IMF meeting or G20 summit but dates back to the 8th Century BC and was penned by the most famous of Greek poets, Homer. His magnum opus – The Iliad – chronicles the events of the Trojan War, a ten-year siege of the city of Troy by the Greeks. Is it possible that our current Greek tragedy will rumble on for a similar period?
The most recent statements from world leaders suggest that a comprehensive plan to deal with the eurozone debt crisis is closer but, with so many interested parties with conflicting agendas, a mutually agreeable solution may be more difficult to agree. Most importantly, if the plan cannot deliver economic expansion, long-term debt reductions and fiscal consolidation across the member states, then we will find ourselves in a similar situation all too soon.
Fundamental reform
Kicking the can down the road is not sustainable, fundamental reforms are required. We cannot continue to raise the level of debt indefinitely without the prospect of paying it back. Economic growth is fundamental to the solution and an immediate loosening of monetary policy essential.
Fiscal unification is somewhat more of a challenge, but I feel it is the crux – integration or disintegration. Much relies on the willingness of the current policymakers to take fiscal policy EU-wide though as we have seen recently, German politicians have shied away from the prospect of issuing eurozone government bonds – they know that their electorate is against it and it could bring down the government
There is currently no constitutional provision for full fiscal union – steps have been taken to make it easier, but politicians have to drive it forward. The stakes are very high and not just for Europe, so we must urge our politicians to act decisively with cohesion and a common vision.
Many of the issues triggered by the crisis of 2008 have been addressed, but there is still much to do. A greater commitment to move global demand from those with large external surpluses to those with deficits, domestic demand and economic growth are required to redress this. We must prevent the call by some for greater protectionism of home markets; this would lead us to an even darker place.
Also, the private sector cannot indefinitely soak up the demand that historically relied on the public sector and again a balance is required. This is difficult as it requires political courage and investor confidence that is sorely lacking and not easily restored.
So where does this leave investors?
Current economic data is consistent with a slowdown not a recession and we should expect equities to perform relatively poorly in the aftermath of a peak in leading indicators. This weakness is usually short-lived with equities rebounding as earnings and margins stabilise and the political outlook improves.
The market correction, although severe and compounded by political risk, leaves the market as a whole with a reasonable valuation despite the current situation. However, at an individual stock level it provides opportunities to invest in quality businesses at levels not seen for many years.
Equities are good value on a variety of different measures including cyclically adjusted ones. Relative to other assets they remain my favoured asset class. In addition, high levels of liquidity persist in many regions which should be seen as another market positive. Doubtless in the short term the focus will remain on external factors and we will see market volatility as the risk on/risk off see-saw continues. For a fundamental investor it is important to try to look through this and focus on what represents quality and long-term value.
We still have global growth and I don’t think we are about to enter a global recession but there are downside risks. We need to ensure that macro policy remains accommodative and governments and central banks must follow through on fundamental and structural reforms to avoid the risks of contagion.
The managing director of the IMF, Christine Lagarde put it very plainly in her address to the World Bank in September: “Act now and act together”. She must be a Homer fan too…
