19

Dec

The City of London only has a permanent resident population of around 7000 (there are no available statistics on the naughty/nice split), so presumably they won’t get a lot of attention when the jolly bearded bloke at the North Pole is marking out his route in a couple of weeks time.

In addition, most investors probably don’t even believe in Father Christmas; they spend their time analysing company reports, foreign exchange rates and global current account balances rather than hand-writing long lists and sending them to the Arctic Circle. However, if there were such a wistful money manager this is what they might have sent up their chimney to Father Christmas…

 

Dear Father Christmas,

I have been a good boy/girl/quantitative analyst all year. I have kept my room tidy, eaten my greens and not broken any of the laws in the Financial Services and Markets Act (2000). So please would you bring me:

  1. A sensible exit from extraordinarily loose monetary policy by central bankers
  2. Continued US growth.
  3. Renewed Emerging Market growth
  4. No political instability in the Eurozone
  5. No housing bubble in the UK

I have left you a glass of wine, a mince pie and a copy of Graham & Dodd’s Security Analysis.

Please say hi to Rudolph.

 

In general investors will be hoping for consistency rather than miracles. After a year in which all of the major equity indices have had double digit returns, where government bond yields have risen gently rather than blown out, and where economic conditions have been improving steadily, the desire is, understandably, for more of the same. Added to that request is a fervent prayer or two that meddling politicians can resist the temptation to ruin the outlook.

The first item is likely to be tricky to deliver. No one is quite sure how a sensible exit from QE should look, because the scale of monetary expansion has been unprecedented in the first place.  Unfortunately it may be that the only way we can find out if the financial system is resilient is to put it under strain – by removing the artificial support that has been in place since the global financial crisis. Of course this need not mean a sudden and total stop to QE but a gradual weaning off the drug of extra liquidity that QE brings over the course of the year. Nor does it mean that all regions must take action simultaneously, but one by one as the economy of that region shows it can stand on its own two feet.

The second item – continued US growth – may be easier to address. After the sequester this year, year on year comparators will be easier for a start and also the adjustment in the cost of mortgages to take account of tapering is already priced into the housing market. Growth so far this year has probably meant that many companies in the US, that have been sitting on cash, now seem more willing to invest in more capacity and even to take on more labour. That said,  what would really embed a consumer recovery would be to see some real wage growth. So Father Christmas, remember that when bringing us more US growth please!

If the US, that old engine of world growth does pick up more steam next year then we can expect that Emerging markets will benefit too. And could you make sure China continues to grow using Emerging Market raw materials too please? That always helps growth for the newly emerging economies when there is demand for their commodities.

Coming closer to home, please stop the politicians from managing to unpick all the good work done by the European Central Bank (‘ECB’) in recent times, by going off on domestic tangents as a populist response to electioneering for the European parliamentary elections this Spring. We have seen some genuine reforms starting to have an effect and really these economies need such change regardless of the political background. It would I suppose be too much ask for an outbreak of commonsense reform in France….. Or political reform in Italy…..

The final wish is perhaps the most difficult to deliver. Here in the UK our obsession with owning our house meant this was an easy way for the government to stoke growth but it is quite worrying that people are being egged on to borrow perhaps a little more than they can afford in a rising rate scenario but given the ‘Help to Buy’ scheme they feel they cannot go wrong! And of course the flurry of activity pushes up prices and so the merry-go-round continues. So Father Christmas, will you make sure people borrow what they can truly afford and can manage when that rainy day finally strikes! And can we ask that we don’t let the prices spiral away up and then drag more inflation into the system?  Would it be asking too much to discourage others from taking out loans based on their property ownership to fund frivolous pursuits such as holidays and yachts and the like?

If we can get through next year with our wishes granted then we will not only have made good strides in the repair of the damage done by the credit crunch but markets should be kind to us too!

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