What a week!  To say that the markets have been a roller coaster is an extreme understatement.  And there wasn’t just big shifts in market sentiment on different days but also within a few hours on some sharemarkets.

So what is going on to cause such huge positive and negative market movements?

While the US does have massive debt issues to deal with, the market jitters have mainly emanated from concerns that the stability of the financial system is under threat in Europe.  The inter-relationship of the European countries has worked well in normal times but is clearly causing problems in the current crisis.  The debt levels and ability to replay bond investors for Greece, Ireland, Portugal and now Italy, Spain and even France are being called into question (and by implication the stability of European banks as well).  Germany is the strongest member of the EU and really can dictate the outcome for Europe.

The market fears that this could be building up to be Europe’s equivalent of the “Lehman moment”.  Back in 2008 the US financial system was close to breaking down over a weekend in September.  Part of the reason it did not implode was that the US Federal Reserve was prepared to act quickly and decisively.  The worry for markets is that Germany and the European Central Bank (ECB) seem less inclined to be proactive and are perceived to be “behind the curve”.   Hopefully they can allay these investor fears over the coming weeks.

Another difficulty for all investors is the wide ranging scenarios that are possible for the global economy.

While in denial the United States appears likely to be heading down a similar path that Japan has endured over the past 20 years.  That is the need to cut high Government debt levels, a move by consumers to save rather than spend and an aging population leading to a sustained low growth period.  However, this is not an economic meltdown as Japan has shown and the good news is that large US companies have generally shown themselves to more flexible and adaptable than their Japanese counter-parts.

In contrast this part of the world is not a bad place to be.  New Zealand is one of the few developed countries likely to experience an accelerating economy over the next 18 months.  Moreover, Australia has more options than almost any other country to stimulate its economy.  This includes the potential for the Reserve Bank of Australia to significantly cut its 4.75% cash rate and for the Australian government to put off the balancing of its budget deficit for a few years.

Throw in China which (while it is likely to hit some “speed bumps”  over the next year) is likely to be a high growth economy over the next decade and you can understand why Milford’s current preference is to have a bias in staying closer to home in what could easily be a choppy market environment for some time.


Anthony Quirk