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Sipp Investor: the implications of Europe's failure to heal itself

The latest European summit revealed just how distant a solution to the eurozone crisis remains, says Rob Kyprianou, and as a result he's struggling to get excited about equities (shares).

 

Hollande, meanwhile, went back to France and started to speak openly of a multi-speed Europe, the Greeks requested a softening of bailout terms, and Cyprus put its hand out for bailout funds on the more favourable Spanish bank bailout model.

The summit is over and it was such a failure that it has left each country free to disagree – and disagreeing they are! We are left with no idea of who runs Europe and what has been agreed. We have witnessed one of the clearest one-step-forward, two-steps-back summits – and now even the forward step is wavering and could be struck down by the German constitutional court.

The global picture

All this fruitless noise has distracted participants temporarily from the disappointing global growth backdrop. The US has clearly slowed to around a lacklustre 2% rate of growth. The second largest economy, China, has also clearly slowed, albeit to a 7-8% rate of growth. The UK looks to be in danger of a third successive quarter of negative growth, while the decline in activity in the eurozone gathers momentum.

Policymakers in the developed West have no meaningful monetary or fiscal policy weapons left to turn things round – quantitative easing is not a pro-cyclical weapon, especially in the current environment, while fiscal policy is and will be a drag on growth for some time to come. Finally, emerging markets – the best of a bad bunch – are showing the repercussions of the developed market slowdown on their own economic activity.

It is hard to get excited about equities with such a depressing economic background. In addition, the possibility of a disorderly outcome to the ongoing eurozone sovereign debt and banking crisis continues to overhang the markets. Normally, in such a context government bonds would be a safe place to hide. However, in the developed world, government bonds either offer virtually no yield (eg, UK, Germany, Japan, the US) or yield but with unacceptable risk (eg, Spain, Italy).

The only area of the bond market that offers a reasonable combination of risk and yield is the corporate bond market, where I have made purchases, and the emerging markets. It will be in these areas that I will look for opportunities to invest my remaining cash while I wait for a more favourable backdrop for equities.

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11 comments so far. Why not have your say?

Jn

Jul 12, 2012 at 08:55

The sooner Germany and its Northern allies decide to form a new Euro zone and get rid of the others, the sooner this whole mess can start to adjust it self.

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Ash Morgan

Jul 12, 2012 at 10:18

Good article. Thank you. Albeit that the overall picture is a depressing one. For those of us who have significant amounts of money invested in equities spread across UK, Europe and US and are expecting to retire in the next 10-15 years there is something of a dilemma. If we are witnessing total collapse of the western world's fatally flawed economic system which will plunge it's population into decades of poverty and falling living standards then one is tempted to sell everything and retire to a fortified home on the West coast of Scotland with a brace of shotguns and a good supply of ammunition. On the other hand a more optimistic view might be that at last our hopelessly short sighted, inept and self-interested politicians might eventually be forced to accept some sensible advice and address the situation in a way that will; eventually, lead to long period of prosperity. If this second scenario were to emerge then history may show that the present time was the most rewarding point to be invested in equities for over a century. Remember one of Warren Buffet's most famous remarks "be greedy when other are fearful". The rewards for a young investor looking to the longer term (and I mean long - say 20 years or more) could be spectacular. The dilemma for the older investor is whether to stay invested hoping the recovery will be within a decade or to sell now. I'd be interested to hear the views of the article's author Rob Kyprianou or any of our better-informed contributors.

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joe stalin

Jul 12, 2012 at 10:20

the new Eurozone's currency would be too strong killing off export markets. Germany et al need the worts of the periferals and they know it. They are just playing hardball with the misfits.

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Andrew Diggens

Jul 12, 2012 at 10:49

In fact this is far from a successful outome for Spain. As can now be seen the loan does in fact come with pages and pages of conditions hence the recent hike in VAT and further cuts in spending. Merkel has in fact given away nothing and the effect of further cuts on an already depressed economy with 25% unemployment will only send Spain in the same direction as Greece. The only obvious wayout is to leave the Euro. But the as can be seen by the ever more ludicrous ranting from the Spainish prime minister (apparently this whole saga is a 'victory' for Spain) the chances of that happening is as remote as ever. In the meantime the destruction of jobs, businesses and peoples lives goes on apace together with rising levels of civil unrest all to protect the elites dream of the Euro.

The question is for how much longer are the ordinary citizens of Europe prepared to let this continue in order to allow the Euro dreams of the people at the top to be maintained?

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William Phillips

Jul 12, 2012 at 10:55

Kyprianou is soooo depressed because his dream of a United States of Europe doesn't look as if it's going to happen after all. The mandarins have not been able to turn the thirty or more distinct, historic peoples of the landmass into a beige mob of docile peons quick enough. Oh dear, how sad for the globalist banksters and their unaccountable, well-heeled enforcers in Brussels and Strasbourg.

And how good for the other 300m of us. Let hundred flowers bloom! More and more devolution, microstates, languages; more ancient sovereignties recovering the autonomy and dignity that was temporarily removed when the old imperial powers exhausted themselves in 1945 and the new barbarian coinquerors moved in from America and Russia. Now the USSR is no more, the USA is heading for dissolution and a multipolar world of glorious plurality emerges, not least on the old continent as the last flickering flame of gigantomaniac nation-killing dies-- not in a welter of blood but with a whimper of bailout and trade war.

The only way western ecoinomies will discover a way out of their malaise is by every nation trying its own solution, so we can tell which works best. Yoking them all together in an 'ever closer union' is hopeless. The EMS's coillapse presages the death of the pretence that 'Europe' is or ever could be one political and economuic unit. Free trade area or areas? Sure, as long as you can pull out. Bring back EFTA, but for the rest-- better off out! Sooner the better, and no English taxes to featherbed Mediterranean lotus eaters and liars.

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peter hart

Jul 12, 2012 at 18:38

I blame my cat Ichabod. Never a problem until he turned up.

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Geoff Downs

Jul 12, 2012 at 20:28

Mr Morgan, with respect I don't think the buying of equities at these levels will prove to be a wise move. Although everyone is highlighting Europe as the problem, in fact the issue is worldwide. What issue, to much debt. The debt problem is not being tackled. Some Governments are trying austerity and some creating more debt, the latter includes the USA. Equities are holding up because of the action of the Fed. and major banks, but printing money will not solve the problem.

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snoekie

Jul 12, 2012 at 21:25

Geoff, agreed in part.

Where companies have solid assets and businesses, buying into such companies now, or on a dip, will result in a rise in price to compensate for the dilution of the currency, never mind the divis. True the value might fall a bit but relatively it should keep pace with the dilutionary effect of counterfeiting.

Furthermore, it will pay, if the right company, a darn sight more than the thieving bwanksters, perhaps by a factor of more than 10, perhaps even 20 and more, as some bwankers pay zilch, diddly squat, zero, niks, nothing, de nada, naint, niente, null, niente, or as a client used to say **ck all minus 50%. So any payment is a zillion % better! In some instances the bwankers even charge you for having any money with them, so the result would be more than quad zillion times better.

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Secret CEO

Jul 13, 2012 at 08:55

Ask Morgan

You offer a black and white (or in the modern day jargon - risk on / risk off) alternative to select from. Life is likely to be more complicated unfortunately with many outcomes that come between these 2 choices. There is also alternative versions of what is a good or bad outcome - e.g. read William Phillips comment to this and precious articles; he clearly regards a poltical disintegration of Europe as a good outcome. The path is also likely to be one full of proverbial twists and turns. As investors we always live in uncertain times and these are particularly uncertain times where the various possible outcomes could be dramatic for our savings.

At the heart of the problem is a banking and debt crisis in the West with significant negative economic repurcussions. It is overlayed by a potentially significant event risk - the break up of the euro in a backdrop of political fragmentation in Europe. These are challenges with multi-year consequences. How we come out it is still not clear and I believe that long term investors should remain cautious while events play out. There is no need to back any particular possible outcome right now - we have the time to observe as the problems are deep rooted and will play out over years not weeks.

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dogdays

Jul 14, 2012 at 12:10

Peter

As your cats seemingly the problem, can you ask him what the solution is.

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katie

Jul 14, 2012 at 12:11

Being a Sipp fund holder who plans to start draw down in 4 years time with most of the fund in equities and bonds I am coming to the realisation that maintaining its current value assuming an average of 3% inflation is the very best i can hope for..does any body out there agree or am I smoking dope

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