* With no end in sight for the Eurozone crisis, further QE seems likely, says Newton's Iain Stewart
* There are investment opportunities to be found in both the corporate bond and equity markets
* Gold could provide a hedge against monetary debasement
"With the very weak performance of most risky asset classes since their May peak, financial markets are signalling loudly to policymakers to ‘do something!'. In a sense, Western policymakers find themselves in a classic debt trap, and they have already expended a huge amount of monetary and fiscal energy trying to get out," says Stewart. "At the risk of mixing metaphors, many might say that when one is in a hole, the best thing to do is to stop digging; we do not, however, believe this is the mindset of the majority of professional economists at the helm of central banks. At the US Federal Reserve, for example, the chairman, Ben Bernanke, strongly believes that if unorthodox approaches to monetary policy appear not to have worked, it is simply because they have not been pursued zealously enough," he adds.
"Whether or not one believes that further intervention in economies is desirable or effective, if current trends in capital markets and economic activity persist, the pressure to print more money to ease the situation will become intense." He explains, "If the European debt crisis escalates further, and/or inflation expectations start to tumble, the political resistance to further quantitative easing would be likely to fall with it.
"Investing clearly remains a challenge in this uncertain, volatile and unprecedented environment. The sheer scale of indebtedness makes many economies unusually vulnerable, ensuring that state intervention, with all its distortions, remains a dominant theme. Free market economics will continue to take a back seat while emphasis remains on protecting bubble-era levels of demand and asset prices," warns Stewart.
Opportunity knocks
"In this investment environment, we continue to believe that the best ‘each-way' opportunities remain in the corporate debt markets and in the high-quality dividend-paying equities," explains Stewart. "In this latter group, we continue to emphasise strong business franchises in classically defensive sectors such as healthcare, telecoms and non-cyclical consumer areas such as food producers. We are also identifying strong franchises with attractive characteristics in areas such as the technology sector, and among agriculture-related stocks," he adds.
"In relation to commodities and energy-related companies, we believe that there are strong supply-driven reasons to have exposure in portfolios, but violent swings in sentiment will continue to make these sectors highly volatile. Our expectation is that, as long as current central bank managements (especially in the US) remain in place, policy will default to money printing if recession looms. This suggests strongly that gold can provide a hedge against monetary debasement," Stewart says.
"More generally, an important message being sent by ultra-low interest rates is that, to achieve an acceptable real return, investors must assume more ‘risk' - in the sense of day-to-day volatility - than they might have felt comfortable with in the past. It is our duty to distinguish such mark-to-market volatility from the genuine risk of losing money (suffering a permanent diminution of value). In today's financial markets, which are highly interconnected, distorted by policy settings and hugely influenced by leveraged speculative flows, very real risks do exist." Stewart concludes, "We continue to believe that the perspective provided by Newton's themes and investment process will help us navigate those risks."
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