There were deaths in Tunisia, whose president was finally toppled by street demonstrations, while Turkey, Egypt and Algeria saw dramatic scenes of violence. The early days of 2011 were further stained by the blood of moderates shot down in Pakistan and the United States. All this illustrates, more vividly than ever, the fragility of today’s geopolitical balance. Another kind of battle still rages over currencies and trade. The killing on these fronts may not be physical, but the combatants are equally ruthless. At stake is the ability to borrow and to export.
The US has got a head start against Europe this year, as demonstrated by the dollar’s gains against the euro and by the strength of the New York stockmarket. But it is hard not to regard America’s new sandcastles, floating on a sea of freshly printed money, as anything but surreal. Here in Europe meanwhile they are selling castles in Spain: governments were back in the bond markets on the first business day of the new year, tapping them for all they were worth. Worse, the EU is more or less overtly tolerating capital adequacy ratios low enough for banks to build houses of cards with nonperforming loans via minority holdings in heavily indebted investment vehicles.
So will 2011 be a year of pitfalls?
That would be a short-sighted view. The developed countries are grappling with excessive consumption and debt. Periods of trouble spread across several years await our economies, financial markets and banks, not to mention at the social and geopolitical levels. The road is indeed narrow, with dangers lurking on either side that no one can ignore. So here is what we recommend as we venture into the first quarter: gold and (even better) platinum; topquality shares (shy away from financials and load up on US companies); short-dated bonds in Australian dollars; hedge funds; and a few property funds focused on niche markets. All this will ensure competitive positioning.
Special attention should be given to currency allocation (which we manage above and beyond the actual investments in our portfolios). Investors based in dollars should stay in dollars, and those based in Swiss francs should stay in Swiss francs. Those based in euros, on the other hand, should maintain substantial weightings in these other two currencies. (Adding a couple of lame ducks could work, provided they do not limp on the same leg...) The forex market continues to display very heavy volatility. The euro recently jumped against the dollar after the Japanese government announced it would buy European sovereign bonds. But the enthusiasm soon faded: after dropping like a stone from 1.3507 to 1.2867 in four days, the EUR/USD rate climbed back to 1.34 in just over a week.
Strict discipline is needed in markets like these. Reacting to such movements with one’s head down can be extremely dangerous.