The week ended with equity markets racing up, in the wake of the bold announcement from Ben Bernanke to inject a further $40bn per month into the US economy, by buying mortgage-backed securities until there is a substantial improvement in the labour market.
Things look better in the eurozone as well, following Mario Draghi’s announcement on the unlimited buying of shorter-dated eurozone government bonds, albeit under strict conditions. Germany’s constitutional court dismissed attempts to block the creation of the European Stability Mechanism (ESM).
All of these things are likely to lead to a continuing rally in the equity markets. The risk is that they create inflation in the longer term. They are also pushing down the dollar.
They will boost the attractiveness of strong dividend-paying equities, and high-yield bonds; also hard assets, such as industrial metals and gold.
The traditional investment approach of seeking genuine unimpaired cashflows from businesses that have strong brands, or technological innovations that protect them against competition, is likely to do best in the current climate. This is the value based approach to investing of Warren Buffett and Benjamin Graham, that has worked so well over the long term.
We could be witnessing an inflection point in the markets, when optimism begins to return. Clearly there are still plenty of risks out there, among which are the so-called fiscal cliff in the US, slower growth in China, the middle east, and of course Europe. A wall of worry for the markets to climb!
Jeremy Davis
Risk warnings
This document has been prepared based on our understanding of current UK law and HM Revenue and Customs practice, both of which may be the subject of change in the future. The opinions expressed herein are those of Cantab Asset Management Ltd and should not be construed as investment advice. Cantab Asset Management Ltd is authorised and regulated by the Financial Conduct Authority. As with all equity-based and bond-based investments, the value and the income therefrom can fall as well as rise and you may not get back all the money that you invested. The value of overseas securities will be influenced by the exchange rate used to convert these to sterling. Investments in stocks and shares should therefore be viewed as a medium to long-term investment. Past performance is not a guide to the future. It is important to note that in selecting ESG investments, a screening out process has taken place which eliminates many investments potentially providing good financial returns. By reducing the universe of possible investments, the investment performance of ESG portfolios might be less than that potentially produced by selecting from the larger unscreened universe.
