PROSPERIS Limited PENNIES
   |
Home
The Management Team Recruitment Pensions Risk Management Service Protection Corporate Services Medical Insurance Mortgages Wealth Management News and Updates Enquiry Forms Testimonials Links Location Map Site Map

Stick or twist?

December 14th 2009

Apparently there is a rumour circulating that Gordon Brown is planning to stand down around the turn of the year. Though the idea and the timing were first floated shortly before the party conference, their resurrection at this time is fascinating. Unlike the swift daggers of the Conservatives, the process by which the Labour party can change its leader is convoluted, albeit with a manual override function in case of emergencies. This means that if they are planning on a change before the election, it has to happen quickly.

The question is therefore, how will the markets react to this? First, there is nothing worse than uncertainty. Ken Clarke recently declared that a hung parliament is an even worse eventuality than a Labour victory; maybe, like Dark Lord Mandelson, the Great Kenprendo is claiming to be above party politics, but it is an unusual piece of candour from such a senior politician. Still, the point he makes is bang on the button: for the markets, bad decisions are better than no decisions. And no decisions is what we shall have if Labour insists on having another leadership election. Executive paralysis at the top and possibly international indecision about the general election. For the market, the best scenario is Gordon Brown leading the government into clear victory or defeat; anything else will be an excuse to sell sterling, gilts and equities; probably in that order.
 
Markets are similarly confused about the state of the world economy at the moment. Some Hedge Fund managers, having been very bullish for several months, are now seeing economic data generally below expectations and they fear that the recovery, at least temporarily, has run out of steam. They are also concerned that there is only one trade in Hedge World at the moment; in jargon, this is short dollar, long risk. This more commonly see as everyone backing the same horse. It is a fine dividing line between being a dead cert and being a one trick pony.
 
Volumes during the recent rise in equities have been pitiful and there are clear nerves amongst even the bulls that equities, like Maggie, are going up, up and away in a beautiful balloon. What is interesting though, is that it is not the recovery that is being doubted, but just the strength of it. Here is where we all need to be looking to the retailers for inspiration; share after share is hitting new 12 month highs, mostly it seems because the “comparatives” are looking so good; comparing today’s low levels of sales with last year’s nothing makes the year on year comparisons look like Boom City. Precisely the same is about to happen to almost all Western economic data: the fourth quarter of last year and the first of this were the pits of the recession and some stunning year on year gains are all but a mathematical certainty.
 
Will this be enough to keep equity markets rising? Probably yes, but even died in the wool bulls have to admit that the stakes are rising dramatically. If we look to the year end, then the potential gains and losses in equities are significant, maybe up to 10% either way. As we are at constant pains to point out, successful investment is about the incessant balancing of risk and reward; for most of this year this equation has been strongly tilted in favour of the latter, it is now not nearly so clear cut.