Since returning from our summer holidays, we have had meetings with or listened to several investment managers on their views on where the global economy is at present.

One common theme is that a realistic to best case scenario is that we are now in an era, which may last several years, of sub 1% GDP global growth; the sell off last month was in part, a recognition by the markets of this fact. If we analyse the statement ‘’… in an era of sub 1% GDP global growth’’, we do actually mean Global growth. Emerging Markets will still grow strongly, although more slowly than in the last few years. If this figure is in the region of 5% GDP growth pa, then it means the developed world will see virtually no growth over the same period. Indeed avoiding recession will be a major task and delivering sustainable positive growth will be a major challenge.

It is in this difficult environment that we seek to deliver investment growth with a reduced volatility. However clients will need to temper their investment expectations, certainly compared to the past. How ironic that statement is when we consider the FTSE today is 24% lower than December 1999!Investment returns can and will be delivered, but we will need to focus on those areas which offer real value and can achieve long term themes. These include taking advantage of the expected growth of the emerging world and their populations gradually moving from a rural to urban lifestyle. Likewise specific growth areas, such as agriculture funds may offer growth opportunities and capitalise on these trends. But with these longer term thematic investment opportunities will come volatility as they are affected by global economic set backs. Investing for sustainable income from global dividend yielding companies may also offer also opportunities.

I recently read some interesting data about long term equity investing. Of course the traditionalists argue the holding of equities long term is the best possible investment, delivering an average of 7% pa. And of course we wholly disagree with this. The data did concur that over the longer term, equities have delivered 6.75% annual growth, however, the research shows that since 1929 equity markets delivered an average of 14%annual growth over periods lasting 17 years followed by nil growth averaged over 16 years. With the major equity markets currently some way below their highs of 11 years ago, this means that we are in for at least a further 4-5 years of under performance. Looking at the current state of the global economy, it could well be considerably longer than that!Indeed the FT recently wrote:

“Today the conditions for the next financial crisis are already in place. Debt remains at pre-crisis levels and US equities and UK property are seriously overpriced. But the ability to reduce the impact of the next recession with large increases in government deficits and sharp falls in interest rates has vanished.”

The economic fundamentals are also very poor for equities. Levels of private and public sector debt are higher than at any other time in history. Merkel and Sarkozy are having to meet on a regular basis to prevent a Greek sovereign debt default and that spreading to the other PIIGS nations. It’s all very desperate. As quoted by Full Circle Asset Management (www.fullcircleasset.co.uk)…’’In our opinion, the investment environment has never been more threatening. John Plender said in the FT “Investors are also conscious of the vicious circle at the heart of the eurozone.

Undercapitalised banks are supporting over-indebted governments by holding their IOUs; over-indebted governments are supporting troubled banks; and there is insufficient equity in the European banking system to absorb the losses implicit in the solvency gap. The outcome is that the European Central Bank ends up providing liquidity on an openended basis to the peripheral countries to keep their banking systems afloat at the cost of an ever weaker balance sheet. The one surprise in all this is that more of the retail deposit base of southern Europe has not disappeared in capital flight.”

Spreading risk and diversifying between multiple asset classes is our preferred method of delivering investment growth with low volatility. The recent market falls were sudden and brutal. It is our view there is a strong chance the FTSE will at some time soon come under further downward pressure, and a repeat of 2008 levels cannot be ruled out. Overall our portfolios did reasonably well, although it was frustrating to lose money. In analysing the last few weeks, from 8th July to 11th August, when the FTSE lost c15% and the average Cautious Managed fund lost 6.15% our Prudent portfolio recorded a loss of 2.86%.