Is it all doom and gloom out there?

By Michael Ranis, July 22, 2010
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It is hardly surprising that there is still a negative attitude towards the global economy at present when recently published statistics do not paint a pretty picture, often falling below analysts' expectations. China is growing at a slower pace (still hovering around 10 per cent, but no longer 13 per cent), and new concerns about an imminent fall in real estate prices worry me.

There are warnings about further problems in Europe as Greeks, Spaniards and others try to put their house in order, while investors seek to figure out the effects on growth resulting from new austerity measures. When equity markets steadily fall additional worries about the psychological effect on consumers are triggered.

Over the past few weeks we have also heard more voices unequivocally stating that, at these levels, equity prices are really cheap - whether these are listed companies in developed markets (UK, Europe, USA) or emerging markets (China, Asia, Brazil). A working assumption for them is that "a double-dip recession" is not on the cards despite the "soft patch" we currently are undergoing. Furthermore, they note, analysts are actually forecasting extremely good profitability levels for a large number of companies. Overall, this positive perspective notes that we are better off now than in early 2009 when the fear of a protracted global recession was common. Yet today equities are priced for economic stagnation. As we ponder whether to allocate more money to "risk assets", we may follow savvy investors like Warren Buffet and Peter Lynch who suggested we should focus more on whether good companies can be bought at bargain prices than guess where markets are going. Recent declines surely lengthened the list of eligible companies; especially if we are likely to see some, even if unexciting, growth.

Even investors sanguine about stocks warn that we may continue to see volatility over the near term. Safe, but extremely low yielding, cash and near-cash investments do offer peace of mind. Still, two axioms prevail: the cheaper a risky asset is relative to its expected returns, the safer it is to invest in it, and the more substantial the return is likely to be.

For those with risk tolerance the set of preferences should be less difficult to discern: selected emerging markets over developed markets; managed funds over index replicating instruments; good companies over weak ones, and companies in sectors with solid growth prospects over those in sectors that are struggling in the current environment.

Michael Ranis is Chief Investment Officer, Bank Hapoalim BM, UK michael.ranis@bhimail.co.uk

    Last updated: 11:21am, July 22 2010