Falcon Perspectives - August 2010
Investment Compass gives an insight into the investment decisions of our specialists.
Investment compass - August 2010
Editorial
The state of the global economy and equity markets have a fairly tight correlation. Generally, global equities take their cue from economic developments in America. The dynamics of the world’s largest industrial nation has decelerated markedly. Some investors fear a renewed recession. What is the probability of such a scenario?The fear of a double dip recession seems exaggerated from today’s point of view. We expect American economic activities to grow in the second half of this year, albeit only very modestly. It is quite normal though that an economy displays a choppy pattern during a recovery period. Hence the current slowdown does not come as a surprise. Analysts expected things to cool down somewhat after the growth spurt in the winter months.
The government is one of the main reasons for America’s lack of economic dynamics. The high national budget deficit of some 10% of GDP is not sustainable and has to be reduced urgently. Saving programmes and/or higher taxes offer bleak options. Due to the uncertain financial consequences of the healthcare and financial market reforms, as well as the numerous regulatory initiatives of the Obama administration, companies are hesitant to invest in new projects and to hire new personnel.
Hence it is very necessary that the US government creates more confidence, security and transparency for its citizens and its companies. A credible plan to reduce the budget deficit should be one of the priorities. In case of failure, there is a risk of a long-lasting period of stubborn economic weakness with uncertain consequences for the financial markets. For the time being, we expect the equity market’s sideways trend to persist for some time.
Investment Overview
July was a good month for equities. But in August, fears of a renewed recession in the USA returned and weighed heavily on the markets.Surprisingly strong second quarter corporate earnings did not manage to permanently improve investor’s sentiment. The Fed’s prudent economic outlook added to the uncertainty.
Investment Overview
Gold as an insurance policy Shares of gold mining companies offer a good instrument to benefit from an eventual further rise of the gold price. Due to the company’s operational leverage, their earnings – and therefore their share prices in the longer term – are generally rising more than the gold price. The Falcon Gold Equity Fund, which invests in shares of gold producers, has performed very well in recent years, both absolutely and compared to its peer group.
Investors are afraid of a renewed recession or even a deflation. There is some probability that current expansive monetary policies of major international central banks, especially the US Fed, will cause elevated inflation pressure at some point. Gold is well suited for both scenarios and increases the stability of a portfolio. The yellow metal has proved a safe haven investment in times of economic and financial uncertainty.