Standard Life Investments

Published Article

A Battle Royal


Seconds out, round one. In the red corner we have the Government Minister, in the blue corner the Business Man. Who will win this epic struggle for the hearts and minds of the financial markets? 2012 has been a disappointing year for both sides, who will disappoint most in the coming few months?

Global economic activity has been weaker than expected since the spring. Consumers have worried about their financial circumstances. Companies have held onto the large amounts of cash on their balance sheets, for fear that the next major crisis might be the big one that throws more of the economy into recession. Is that a ray of light we see into year end? There are some signs that global consumers are spending, especially in the US and Asia - buoyant car sales would be a good proxy. The stimulus measures in China, the improvement in the housing market in America, the slow rise in jobs in the UK are all supportive. Although the European economy looks set to stagnate, at best, ever cautious economists are talking up the prospects for other parts of the world into 2013.

Will politicians stand in the way, or can they spur on such trends? Societies are under considerable stress, yet painful decisions need to be taken, sometimes painful for the elite, sometimes for the mass of the population. Can Eurozone finance ministers agree how to use taxpayers’ money to wipe out Greek debt, bringing debt/GDP ratios down to manageable levels? The recent contretemps between the IMF and the EU showed how even policy makers can disagree. Can Republicans and Democrats agree on how to share the pain of tax and spending changes, ones which must hurt many businesses, such as health and defence companies, and many households, not just the ultra high worth individuals but well down the income spectrum? Can China's new politbureau agree on how to rebalance the economy, benefitting consumers but upsetting exporters and potentially many of its own officials as they lose power and patronage?

The central assumption for investors must be that 2013 looks a lot like 2011 and 2012, a series of short, sharp market rallies and then collapses, driven by uncertainty about each political hurdle. There are sizeable resources though which can be put to work in risk assets, if there is greater confidence that crises can be overcome and reforms pushed through, reforms which would raise corporate profitability and extend this business cycle.

Andrew Milligan, Head of Global Strategy, Standard Life Investments

First Published in Citywire Wealth Manager, November 2012