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World markets resemble a child’s chemistry set, says Newton’s Iain Stewart

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The world’s markets resemble a child’s chemistry set in which lots of different elements fizzing could explode, according to Iain Stewart, manager of the Newton Absolute Intrepid Fund.<

The world’s markets resemble a child’s chemistry set in which lots of different elements fizzing could explode, according to Iain Stewart, manager of the Newton Absolute Intrepid Fund.

When asked to provide an outlook on today’s investment markets, Stewart said: ‘Our thematic approach leads us to believe that we’re witnessing more than just a very severe cyclical downturn with a financial crisis superimposed. Under almost all scenarios of bank rescue and repair, the era of under priced and super abundant credit is over. Individuals, households and companies will continue to reduce indebtedness, while governments broadly increase theirs. 
 
Stewart said the risks that financial institutions will be able to take on will be severely curtailed, making them inherently less profitable at best, while increased state interference almost guarantees more economic volatility and market risk than we have been used to. 
 
‘At this juncture world markets resemble a child’s chemistry set: lots of different things have been put in a test tube; there may be a gentle fizzing, but they could just as easily explode,’ he said.
 
‘An explosion is likely to mean that investors sniff inflation, and we continue to believe that is inevitably where we will end up. Authorities globally are desperately trying to avoid publishing negative rates of inflation and it seems reasonable to assume that in the longer run, they will ultimately be successful. Contrary to popular perception, deflation is not always malign (falling goods prices as a result of strong productivity or new technology, for example, are not a bad thing). However, falling asset prices, and particularly wages, when combined with too much debt are a toxic combination.’ 
 
Stewart said that in addition to increasing the real debt burden, deflation crimps nominal GDP on which taxes are raised and profits are earned, creating a major problem for government finances, corporate earnings and dividends. Fear of this kind of Japan-style scenario explains why governments and central banks have thrown caution to the wind and why they are willing to move to unconventional measures, such as money printing, in order to stimulate their economies.
 
‘Against this background it still seems prudent to take a cautious and highly selective approach to investing our portfolios. Right now markets are rallying strongly. Time will tell whether this will prove to be the start of some kind of bottoming process. In their favour, both equity and corporate bond markets now appear to offer reasonable value. Moreover, aggressive de-stocking may have exaggerated the trajectory of the economic decline in the past few months. The economic news could get ‘less bad’ and this, combined with improvements to sentiment engendered by countless stimulus packages and initiatives, might just give the rally some legs,’ he added.

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