Volatility

•  This week’s events have clearly demonstrated that markets believe that the US and Europe political leadership has been found woefully lacking and we have seen two failed attempts so far to address the debt problems within the Eurozone. These have failed due to a lack of firm European political leadership, ensuring that each outcome is a flawed compromise based on the lowest common denominator of country self-interest.
• Likewise, in the United States, we have also witnessed the world’s largest economy being used as a football in a game of political brinkmanship between the Republican and Democratic parties. Despite the very short term resolution of the debt ceiling crisis, it is clear that the world’s largest economy has some way to go before it has resolved its own debt problems.
• Politicians must now accept that their solutions have not worked and that solving these problems are more important than country electorates. They have to set aside local vested interests and create a solution to the debt crisis and economic problems in the developed world which is seen as credible by financial markets.
• Individual savers and investors have continued to suffer during this political dithering as markets have been volatile and cash returns have been negligible. After such short term and widespread market falls now is not the time to sell out of markets and so crystallise current low prices.
• Fidelity International has the following guidance for savers and investors.

 More adventurous investors

• At times of sharp volatility, all markets tend to be affected equally. Asian and emerging markets currently look oversold versus developed markets due to their much stronger economies and lower debt levels. This provides opportunities for investors with a greater risk appetite. "I believe the recent stock market volatility reflects a familiar pattern during this bull market of short, but often very sharp set backs, within a bull trend. For some time I have argued the outlook for the US and particularly Europe is for growth but well below normal growth rates. In my view this makes the case for exposure to developing markets and particularly those of Asia even more compelling where growth rates by comparison, even though they are slowing, will still be very attractive". "History shows that normally extreme equity market volatility as we are now experiencing should be seen as a time of opportunity rather than a time to become more defensive". – Anthony Bolton

Savers

• A result of this week’s events may well be the continuation of weaker economic growth and the higher debt burdens in Europe and the US than were being forecast even a few months ago. Interest rates are therefore likely to remain low for a long time to come. On top of this, returns on cash will continue to be substantially eroded by inflation, even if this reduces as commodity prices decline from the current peaks
• Whilst savers may be nervous about investing in markets for growth, they will still need to search for higher levels of income. There are 2 areas which can provide good quality income right now: equities and high quality corporate bond “Savers needing income should look at equity markets. Since the global financial crisis, many good quality companies have been rebuilding their balance sheets and generating strong cashflow and good profits. Even if equity markets are showing volatility in growth, equity funds can provide a good alternative source of income. The MSCI Europe Index is currently yielding 3.9%. For the last 20 years, investors have bought equity markets for capital growth, but now is the time to buy equities for income.” Dominic Rossi, Global CIO, Equities “Many corporate issuers are now rated as lower risk than national governments. In recent years, companies have been taking the steps that governments should have been taking and paying off their debt. We now have a good range of companies who can service their debts and with interest rates likely to stay lower for longer, this will be positive for total returns from corporate bonds. Good quality corporate bonds and “go anywhere” strategic bond funds can be an attractive investment opportunity in times like these.” Andrew Wells Global CIO, Fixed Income