We do not believe that we will have to endure another year like the one just passed in our lifetime. 2008 was shrouded in economic gloom following the collapse in commodity prices and the banking system and the stock market was characterised by unprecedented levels of volatility and some of the worst returns on record.
The extent of the problems which riddled the banking system and the devastating effects of the unravelling of hedge fund positions could not have been foreseen. Following a prolonged period of forced selling, as the hedge funds de-leveraged to raise cash and meet investor demands, global equity markets are priced with little regard for fundamentals. In the medium term this provides an excellent opportunity for high returns.
In the short term - through 2009 - the outlook is less optimistic. We believe the forced selling is coming to an end but think that equity markets will continue to be volatile as investors nervously trade between gloomy economic news and attractive valuations. Unemployment is the only figure we predict will go up in a straight line in 2009 but we must remember that the stock market is forward looking and will be one step ahead of the expected disappointing economic news.
It is necessary to look at the stock market that led the down turn in order to predict which market might lead us out of the turmoil - the US stock market. It now appears that the US economy was the first to fall into a recession so the US market moves were an accurate reflection of things to come. The UK is at least six months behind the US but a lot of the bad news is already priced into our stock market and we must simply endure the volatility that accompanies uncertainty.
The fall in Asian stock markets is more difficult to understand. Having largely escaped the problems which emanated from the developed world, Far Eastern markets witnessed huge falls due to the withdrawal of liquidity. Latin American markets suffered a similar fate but their exposure to commodities better explains the falls in share prices. We have been advocates of long term investment in both continents because of the growth of the consumer which has resulted in a decrease in those continents’ reliance on the developed world. This continues to be the case and is evidenced by reports from global consumer giants and an increase in trade between developing countries where, in some cases, revenues from exports have overtaken those to the developed world.
The outlook for 2009 is difficult to predict as we await the further consequences of the credit crunch. However, nothing changes the fact that valuations, based on underlying fundamentals, are attractive and that fear is the over-riding emotion keeping markets at such depressed levels. We can now close the door on 2008 and look ahead to the light at the end of the tunnel. 2009 will be about maintaining our resolve but we believe the worst is over.
