An independent professional's take on the latest news and trends in global financial markets

Unarguable Sense From Philip Gibbs

Some bullet points and a telling slide from a recent presentation by Philip Gibbs, the  fund manager and financials expert at Jupiter Asset Management. Not much need to comment, as it is hard to argue with anything in it (although the recent performance of Philip’s funds has been somewhat disappointing by his own exalted standards).

Medium term investment outlook:

  • Emerging market assets and currencies are by far favoured over the developed world.
  • On a view of a few years it seems highly probable that a crisis will ensue as a result of developed world indebtedness.  Governments may have to print so much money that they will unleash inflation.  US and Japanese government bonds will probably perform terribly.
  • Western equities relying on Western consumers will face many problems as a result of this situation.
  • The Swiss Franc and gold will probably perform exceptionally well.  The dollar and the yen and sterling and the Euro look to have a dismal outlook.

Shorter term investment implications:

  • The equity market will perform well if there is reasonable stability in Western economies because equity pricing reflects extreme nervousness.  On the other hand it is also possible that a double dip materialises and shakes confidence.
  • Western government bonds are likely to perform poorly except in the short term in a double dip scenario.
  • Corporate bonds look fairly priced but with attractions in the very high yield portion.
  • The yen and the dollar will be poor except in a double dip scenario.  The Swiss Franc looks a strong bet for either a more bullish or bearish scenario.  Sterling looks unpromising in both scenarios.

His chart shows the relative valuations of gilts and equities on a long term view. It brings out neatly how far the two have drifted apart. Of the two the most anomalous, as discussed here before, is the yield on gilts, which appears to be implying a doomsday scenario which is possible, but far from certain.

Gibbs makes a key point when he says that, unlike previous recessions, gilts would still be unattractive even if a double dip recession does materialise. The yields are simply  too low to make them worth holding and governments would have no option then but to inflate their way out of the budgetary mess that a double dip would cause.

The earnings yield on equities meanwhile makes the market look attractively priced on a medium term view, albeit with the usual attendant risks.

Written by Jonathan Davis

September 27, 2010 at 9:27 AM