The Greek Parliament today voted in favour of the austerity measures which were a necessary condition for receiving the next tranche of aid from its original bail-out of last May. The vote should now allow the second bail-out, rumoured to be in the region of €120bn, to be made. This together with the original bail-out will enable Greece to fund its debt until 2014 and should prevent a default, in the short term at least, which has been threatening to disrupt financial markets during the last few weeks. There is a further vote on Thursday to change the law to allow the austerity measures to be implemented but with the first vote having been passed the second should also be successful. Initial market reaction has been positive with the FTSE 100 rising to 5,860 by close.
Whilst the additional bail-out will not solve the problem long term, the consequences of the alternative would have been severe for the remaining EU member states and even the UK. The bailout will buy time for banks and governments, while they improve their balance sheets, to the point where a Greek default would have less damning effects on the global economy.
How are the Fiducia portfolios positioned for the current environment?
Very little has changed in terms of portfolio asset allocation over the past six months and this is likely to continue while global growth remains sluggish. For some time now we have emphasised capital preservation in preparation for a setback in markets, largely as a result of ongoing Euro zone issues.
In terms of assets we have been underweight bonds as we feel yields are unsustainably low and offer poor value, we instead prefer absolute return funds and even property to a small degree. Both of these assets give the diversification and potential for positive returns in falling equity and bond markets.
Whilst we have been fairly cautious we are not underweight in UK and Global equity, seeing value in those equity income funds investing in companies with strong cash flows and sound balance sheets. In the current low growth environment we feel equity income funds will outperform as dividends account for a greater proportion of total returns. Elsewhere we have been reducing general commodity exposure but maintaining holdings in gold and agriculture, two sectors we feel should continue to outperform in a low growth, low interest rate environment where inflation remains above target.
Our cautious position went against us in the last six months of 2010 as investors lost sight of EU debt problems and piled into risk assets such as equity and commodities, which rallied strongly. Our positioning paid off in recent months as markets corrected and we remain well positioned for any further economic uncertainty. Perhaps more importantly the portfolios offer good protection against inflation and strong potential to outperform returns available from cash as interest rates look likely to remain low well into 2012.
Dean Aitchison BSc, IMC