Could it ever be as tough as the 70s?
Hard times have hit the funds industry in many parts of Europe, with deflation threatening to eat up sparce investment opportunities.
Growing up in 1970s Britain, soaraway inflation was the bane of parents and governments. Living costs, particularly for staples like baked beans and bread, rose weekly, sometimes daily. Double digit inflation led to social unrest, encompassing candlelit nights during power workers’ strikes, a humiliating visit from loan sharks at the International Monetary Fund in 1976, and, finally, widespread public sector disputes bringing down Jim Callaghan’s Labour government after the “Winter of Discontent” in 1979. Three decades later, it appears Europe’s governments have been too successful in fighting inflation. In fact, the spectre of deflation – which led to negative interest rates in Japan – has come knocking on Europe’s door. An unprecedented era of falling prices is now an official worry for policymakers, according to the European Central Bank. The prospect of minimal returns from cash funds and other investments should be of concern to distributors and private client advisers. Even today, PWM’s survey of Europe’s biggest money market fund providers shows that only Goldman Sachs can beat a long-term euro cash index. The only other underlying funds currently enjoying real success among Europe’s distributors are high yielding investments. Putnam, for instance is concentrating on marketing its European high yield fund through distribution partners. Stephen Cohen, the brain behind equities and quantitative strategies in previous incarnations at Merrill Lynch and Dresdner RCM, has forged Putnam’s Continental campaign: “European high yield has matured into a non-correlated asset class of a size big enough for investors to achieve sector diversification”. Non-correlation is the key to other opportunities. Marketing of hedge funds is slowly being liberalised by EU directives: Germany is expected to allow introduction of hedge funds next year, and Frank Russell has already strategically positioned itself through a hedge fund partnership with Frankfurt’s Metzler Asset Management. Liberty Ermitage, one of Europe’s fastest growing alternatives managers, is backing both hedge strategies and gold. Liberty’s veteran chief executive Ron Mitchell expects the $350 gold price to continue to rise sharply if the dollar weakens further. “This is the toughest market I have ever experienced,” said Mr Mitchell. “Even the 70s were not as bad as this. Deflation is a threat, we have the lowest interest rate environment in 40 years and the amount needed to retire has doubled or trebled.” Yuri Bender
Editor
