After a promising start to the year, Q2 2012 was mostly dominated by the ongoing political and financial machinations in the Euro zone. Uncertainty about the outcome has caused contagion across almost all the world’s equity markets as more nimble investors reduced their exposure to riskier assets. The US and selected emerging market economies remain the notable exceptions, although even the US is now facing the prospect of slower economic growth.
Government bond markets endured mixed fortunes. The bond markets of “Super Sovereign” states with no direct exposure to Europe continued their seemingly unstoppable rise, whilst those in Europe fared much worse. Although Super Sovereign bond markets shrugged off transition to negative real (after inflation) yields, the transition to negative nominal yields may not be so easy and it would appear that the potential for further price appreciation may be limited. However, as long as the relative price appreciation continues, Super Sovereign bonds remain attractive as insurance against a potentially catastrophic outcome.
Listed property has been one of the better markets to be involved in over the last 12 months. Not only did it deliver better relative performance during the second half of last year, but that strong performance has carried on into this year. There are several reasons for this and I expect that they will persist for some time yet. Firstly, low interest rates make listed property an attractive alternative to cash on deposit from an income and total return perspective. Secondly, printing money (quantitative easing) creates inflationary expectations and investors seek to direct their capital into physical assets. Lastly, listed property is still well below the peaks reached prior to the credit crunch and, from a valuation perspective, the sector remains very attractive.
Energy markets, as represented by the Dow Jones –UBS Energy Sub-Index, fell almost 14% in US$ terms over quarter two. This is likely to provide some relief from inflation and stimulate demand from the private and corporate sectors which is welcome news considering the economic backdrop.
With markets seemingly at a crossroads it pays to have an investment strategy which is nimble and will rotate into safer assets if market conditions deteriorate whilst remaining flexible enough to add riskier assets as market conditions improve. If you would like to discuss whether I can help you or your clients implement an investment strategy like this, please do not hesitate to contact me.