December 2007 - Market Turmoil

I am pleased to give you some observations from conversations and reading about the development of the current economic turmoil.

You may have read that Alan Greenspan is worried about inflation. In the long-term he maybe right, but I think he is living in an ivory tower and is not connected with Western consumers and the debt crisis that could overwhelm them. In the short-term, I think the current debt crisis will take some interesting turns.

In the next 6-8 weeks, we may well see a further collapse of some venerable financial institutions and further support from central bankers around the world. However, the initial turmoil will probably be over by the end of October or the beginning of November.

The second issue and one which will take some time to play out is the effect of reduced credit availability among consumers of developed Western economies. Anybody who has been near a Citizens Advice Bureau recently will know that for some years, the overwhelming demand for their services has been from people of all walks of life who are overwhelmed with debt and this is only going to get worse. As people find they cannot recycle their credit cards, cannot borrow more money on their properties to pay off their credit cards and in conjunction as we find people can't take out suicidal mortgages to purchase multiple buy-to-let properties, or indeed ludicrously overpriced property on income multiples of 8x, this will all lead to a significant reduction in consumer spending power for a sizeable percentage of the population of developed economies: here, the USA and Australia etc.

The big question is whether emerging markets or indeed 'emerged' markets can take up the slack of reduced consumer consumption in the West. It is undeniable that China, India and Russia etc., have huge amounts of cash in the bank. They have populations with low debts and high savings ratios but will they start spending? The probability is that they will start to evolve greater consumption but I am not convinced that this will occur at the same rate that Western consumers slow down.

Information from our contacts at the sharp end in China have re-confirmed several times recently that the Chinese market will continue to expand rapidly until September 2008, i.e. just beyond the Beijing Olympics. At that time, the Chinese market will have moved ahead substantially and we all know that the Chinese love to gamble. It is our belief therefore that we should start to reduce our exposure to emerging markets and in particular Chinese investments during the spring and early summer of next year to capitalise on the enormous gains and await for what could be a significant crunch.

The confluence of both a Chinese equity correction and the final realisation of consumer contraction in Western economies could create a fairly significant down turn in economic activity towards the end of the 2008.

We will therefore continue to move our client portfolios into cash and fixed interest funds and to maintain a fairly healthy split between equities and fixed interest on a balanced basis. The maintenance of an equity portfolio has to be considered because of course any number of factors may mean that the global economy continues to expand, global growth can be controlled by central bankers and the evolution of society remains far more positive than appears to be the case at this point in 2007 .