Pessimists say the ‘credit crunch’ could cause a global recession and a financial meltdown. I say this is baloney.
It is irrational fear and panic and will soon be over.
It is far more likely that we’re seeing a ‘growth pause’ than a real recession and that means the investment outlook is very positive.
The doom mongers use huge numbers to terrify us. They say that globally, the banks’ losses in the credit crunch will reach a trillion dollars - that’s a million million, enough to scare most people, even central bankers.
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Big potential paper losses that may never appear
But look closely and the numbers evaporate like mist. Those loss numbers are based on the write-offs banks would suffer if they wrote all their loans down in line with a little-traded and unreliable index of supposed market prices of similar loans.
In fact, banks do and should write off loans based on their realistic expectations of defaults - the numbers of people who won’t pay and the actual losses the bank will suffer when it repossesses and sells the assets.
Realistic write-offs are likely to be a fraction of those trillions - perhaps in the order of £100 billion - a big number but easily manageable. The Bank of England pointed out in its recent Financial Stability Report that losses are never likely to reach the levels implied in current ‘distress sale’ prices.
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The worst of the crunch is over
The Bank of England’s best guess is that the worst of the crunch is over and that conditions will slowly return to normal - though normal does not mean the mad lending frenzy of 2005-07.
Normal means paying 1% to 1.5% above base rate for a mortgage, so if you can get a loan at less than 6% - as many re-mortgagers still can - you are still far better off than you would have been at any time except in the lending boom of 2004-07. You’ll never see deals like those again.
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Not a real consumer squeeze but a growth pause
At the same time as lending rates are adjusting to reality, another adjustment is happening both here and in the US. Consumers always spend more when they feel confident that the value of their assets is rising.
For assets read property, and the slump in US property prices and gentle decline in the UK have led consumers to spend less and save more. This is a necessary adjustment and is being accompanied by rising exports for the UK and US and shrinking trade deficits.
The fact that a consumer squeeze is being accentuated by rising fuel and food prices makes it more painful, but it’s not a 1980s-style recession (25% of manufacturing industry closed down) or even a 1990s-style recession (10% unemployment). In fact, we’re likely to see a modest rise in unemployment over the next year as financial companies and retailers lay off staff.
Growth in the emerging giants remains high
Domestic growth in China, India and Brazil remains high, so much so that both the Chinese and Indians are having to take stern action to slow down inflation rates of 7%-plus. A recession in either China or India would lead to social unrest and political turmoil on a massive scale, which makes it highly unlikely.
So this is more like a ‘growth pause’ than a real recession, and that means that after a 10% setback from their mid-2007 peaks, stock markets are giving too much weight to gloom and not enough to boom.
How our selected Global Growth funds have performed
| Fund | Six months | One year | Three years | Five years |
| Franklin Templeton Growth | -4.3% | -5.9% | +32.6% | +81.2% |
| Investec Global Free Enterprise | -11.3% | -6.2% | +44.2% | +114.0% |
| Jupiter Merlin Worldwide | -5.3% | +0.1% | +46.9% | +112.1% |
| M&G International Growth | +3.1% | +6.3% | +65.1% | +156.9% |
| JPM Emerging Markets | +0.6% | +22.5% | +141.4% | +299.9% |
| Schroder Global Equity Income | -3.1% | NA | NA | NA |
| Global Growth sector average | -4.2% | -1.0% | +45.0% | +86.4% |
| Rathbone Global Opportunities | -6.6% | +5.6% | +84.3% | +176.4% |
| SVM Global | -5.0% | -2.7% | NA | NA |
*Including reinvested net income. Data to 2/5/2008. Source: Financial Express
If you compare the performance of our selected globally-investing funds with those investing in the UK and Europe, they’ve done significantly better. Today’s relatively open trading system offers great opportunities for entrepreneurs all over the world, and to benefit from that what you need is a fund manager prepared to seek out the best companies wherever they happen to be based geographically.
Geographic location is less and less important - to give just one example, lots of companies registered in the UK and with share listings in London do almost all their business abroad.
Different styles of global growth
Our selected funds are very different in terms of style and approach.
Schroder Global Equity Income, a relatively new fund, is conservative, because it applies the tried-and-tested ‘equity income’ approach to global investing. Over the long term I am sure this will work out, but be prepared for periods when other funds that take bigger risks bring home more bacon.
Jupiter Merlin Worldwide is a ‘fund-of-funds’ investing in other global funds. In general I don’t much care for fund-of-funds - many of the managers are mediocre - but the Jupiter team led by John Chatfeild-Roberts has a good track record and Merlin Worldwide has produced better-than-average results over several years.
Franklin Templeton Growth and M&G International Growth are similar, but M&G’s performance has been superior and Franklin Templeton seem to have lost their edge, so their fund is being removed from the list and is being replaced by Rathbone Global Opportunities.
Globe trotting stock picker
Rathbone’s manager James Thomson is a typical globe-trotting stock-picker. Since he took over management in 2003, results have been good but he warns that investors need to give him three years. He buys smaller companies that may take time to deliver on their promises, and the fund is likely to prove more volatile than most of its peers.
Investec Global Free Enterprise is unusual in concentrating on companies that have either been privatized or are benefiting from privatization of an industry or sector. The fund has a great record but is going through a lull at present, and unfortunately I feel this may last some time, since I don’t believe we will see sizeable privatisations in India or China for some years yet.
JPM Emerging Markets is one of the best in the ‘hot’ emerging market sector. The JP Morgan ‘team’ approach is especially valuable in an area like this, where single ‘star’ managers can get infatuated with the prospects of a country or region and end up taking on too much risk. Still, this remains ‘sex and violence’ fund compared with Schroder’s cup-of-hot-chocolate. A modest investment in emerging markets is a good idea for long-term growth.
Mavericks with a plan
I am also adding a very different new fund to the list: SVM Global. SVM is a maverick fund management group started and owned by two successful managers who apply contrarian value thinking to whatever they do.
SVM Global does what the SVM investment trust of the same name has done for many years: it buys investments in very different types of assets, including hedge funds, private equity, property and funds investing in water, infrastructure and other exotic areas.
The aim of this ‘multi asset class investing’ – that’s the new buzzword - is to generate steadier returns than you tend to get from the stock market rollercoaster. So far SVM’s results show that it works - it has achieved high returns with lower than normal volatility - and I also like the fact that the individual managers have a lot of their own money invested in the fund.
Important risk warning - please read
The value of your investment and the income from it can go down as well as up and you may not get back a significant proportion of your investment. Past performance is not an indication of future performance. If you are in any doubt as to the suitability of an investment, you should seek independent financial advice.
