While Q3 saw a slight improvement in global equity markets and headlines predicting the demise of Europe have faded, the slowdown in economies globally persists. Indeed, the International Monetary Fund issued a warning in October that the global economic recovery is in danger of unraveling unless policy-makers in the US and Europe move quickly.
Global markets got a lift mid-September, when Chairman Ben Bernanke announced the third round of quantitative easing (QE3) by the US Federal Reserve (Fed). Bernanke committed the Fed to purchase $85 billion a month in bonds for the remainder of 2012, with further commitment to purchase $40 billion a month indefinitely as long as economic conditions warrant such action.
Mario Draghi, the president of the European Central Bank (ECB), promised in July that the ECB will do whatever it takes to save the Euro. And while the political dissension in Europe continues, Draghi has a reputation for getting things done. One of the “five wise men”, a group of economists whose views help shape the debate in Germany, Dr. Lars Feld estimates that a collapse of the Euro would cut German GDP by up to 10%. It is hard to see that political brinksmanship will not eventually have to give way to economic pragmatism.
With the forthcoming US election and continuing wrangling in Europe, Q4 could potentially be very volatile. The fiscal overhang in the US may continue to handicap the broader economy but may have little impact on individual stocks that are well capitalized and cater to a global marketplace.
The ongoing tensions between Iran, Israel and the US mean that oil prices will likely continue to be impacted in the short to medium term. Slowdown in economic activity in China and other emerging markets may have knock-on effects for the developed markets. However, Emerging Markets continue to be engines of growth for the global economy and any slowdown in these markets is relative to the high growth rates of recent years. Political uncertainty remains the overhang still surrounding Europe; yet there are reasons to be optimistic about the prospects of individual stocks in the eurozone because their valuation and long-term growth prospects are compelling.
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Beware that flight to safety doesn’t leave you with plucked feathers
The emotional scars of the financial crisis, and the resulting market volatility, are still there and the numbers show it. Looking at recent US statistics as a proxy, over the last 30 months almost US$200 billion has been pulled out of equity funds and more than US$500 billion has been invested in US fixed income investments. [ICI, Morgan Stanley Research] Given our current low-yield environment, these choices can pose a real cost to investors. When you factor in taxes (keep in mind that interest income is taxed at the top marginal rate) and potentially, rising inflation, the net yields on cash and fixed income investments could mean that the purchasing power of the dollars invested in these investments may fall every day.
Now, if you need that money for a rainy day or in the next three to five years, then yes this is probably a necessary cost for you to bear. However, for those who don’t need some or all of their savings for five years or more, protecting the purchasing power of their savings will likely require some exposure to the equity markets. Despite the current market volatility and “noise”, many professionals expect the stock market to be higher in five to 10 years’ time than their current levels. If your goals and risk tolerance permit, good quality, liquid, dividend- paying stocks may provide a measure of stability to your investments while helping to protect your long-term purchasing power.
Investors need to keep in mind that capital risk (i.e. losing money on their investments) needs to be balanced against shortfall risk (i.e. not having enough on hand to meet their goals). And in today’s environment, the second risk perhaps should be a bigger concern for most investors.
The opinions expressed are those of Manulife Asset Management® as at October 15, 2012, and are subject to change based on market and other conditions. The information in this document including statements concerning financial market trends, are based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. The information in this document may contain projections or other forward-looking statements regarding future events, targets management discipline or other expectations, and is only as current as the date indicated. There is no assurance that such events will occur, and may be significantly different than that shown here. Manulife Asset Management disclaims any responsibility to update such information. All overviews and commentary are intended to be general in nature and for current interest. While helpful, these overviews are no substitute for professional tax, investment or legal advice. Clients should seek professional advice for their particular situation. Neither Manulife Financial, Manulife Asset Management®, nor any of their affiliates or representatives is providing tax, investment or legal advice. Past performance does not guarantee future results. This material was prepared solely for informational purposes, does not constitute an offer or an invitation Manulife Asset Management to any person to buy or sell any security and is no indication of trading intent in any fund or account managed by Manulife Asset Management. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.