Time to make critical and obvious choices

PWM: You have said recently you were disappointed by the policy pronouncements from both Europe and the US - what should their political leaders be doing?

James Bevan: What happens to the world economy is now in the hands of its Central Bankers. That is because private credit growth and fiscal stimulation are not sufficient to sustain adequate economic growth. Although what Central Bankers should do is pretty obvious, they still have to make some difficult choices. Those choices will determine what comes next.

It is now obvious that the world as a whole has slowed as a result of recent fiscal and monetary tightening in both developed and emerging countries. It is also now obvious that developed, debtor countries with linked currencies-monetary policies are crashing while those with independent currencies-monetary policies are stalling. 

It is also clear that emerging, creditor countries with linked currencies-monetary policies are still in inflationary bubbles that are easing (due to the global slowing and due to their modest tightenings), and that emerging, creditor countries with flexible currencies-monetary policies have slowed more materially. 

So it’s clear that all countries have slowed, those that were the slowest to begin with are now in the most trouble, and the imbalances that are behind these problems remain. 

PWM: What kind of assets should European investors be favouring now to protect their portfolios against further turmoil and to anticipate any possible recovery?

James Bevan: Many equities look well priced – strong balance sheets, robust free cash flows, sustainable returns on invested capital and exposure to still fast-growing markets and economies. Prices will be volatile for sure, but some share prices look to discount very bad news.

PWM: Do you feel the recent riots in the UK were part of the trend of much broader economic-driven civil unrest that has swept across Europe and elsewhere and how important will combating such a trend be in the eventual cure that is to be found for our economic ills?

James Bevan: Leverage and consumerism created expectations that did not match underlying economic realities and contributed to wealth inequalities. This was always going to create dissent and discomfort for economies and their citizens. Changing the political agenda and societal priorities is critical and difficult. And it’s essential for challenges such as global warming as well as near term economic success.

In the October issue of PWM, James Bevan presents his economic forecasts, his diagnosis of Europe’s ills and lays down his plan for action.

James Bevan, CCLA