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November 28, 2011 at 07:00 PM
Given the dramatic market volatility we have seen over the past few months, we thought it wise to provide our take on what is driving the turbulence, especially in light of the short-term surge in the U.S. dollar and the declines in commodity-related investments.
Global Pressures
The trend downward since June has been primarily driven by slower expectations for worldwide economic growth and growing skepticism that monetary and fiscal stimulus will be able to address the problem. Adding to the volatility have been key events such as the Japanese earthquake, the U.S. debt ceiling debate, the U.S. debt rating downgrade, fear over inflationary pressures in Asia and ongoing concerns that China will crash after a period of rapid credit expansion. But perhaps the most significant event is the ongoing debt crisis in Europe, which has stoked widespread fears of a European banking crisis that may even threaten the existence of the euro itself.
The market has long concluded that Greece will default. However, larger nations such as Italy and Spain have been an uncertainty. While policymakers suggest one plan, the market grows increasingly impatient. When economic growth slows, the market grows even more concerned. A solvency crisis for large nations in the eurozone would have significant negative implications for the global economy: first, for the banking sector, then spreading to other sectors of the economy as global liquidity tightens. The impacts would be felt worldwide, and the difficulty in seeing past the crisis is reflected by current global stock valuations. Sentiment is extremely low, and cumulative short interest on major U.S. exchanges has recently hit 2009 highs.
Strategies
Despite the fear, Euro Pacific Capital has not abandoned our long-term, value-oriented approach to global markets. We continue to maintain our exposure to high-quality, dividend-paying companies with solid balance sheets and minimal exposure to Europe, Japan, the United Kingdom and the United States. In our managed accounts, we are currently taking opportunities to add to these positions. We also increased our precious metal exposure early in the year. We have maintained our overweight allocation to non-cyclical sectors such as consumer staples and utilities.
