the problem with consensus

the problem with consensus

November 8th, 2011

The picture in the eurozone is miserable. As soon as one issue is addressed, another springs up to take its place – Greece finally gets its government on a surer footing, only for problems to arise in the Berlusconi administration in Italy. There is some optimism emerging markets – and even the US – may be able to ‘decouple’ from the crisis, but the fortunes of the UK – perhaps unsurprisingly – continue to be seen as inextricably linked. This may go some way to explaining why the recent raft of better news from the UK economy has been greeted with a shrug by economists. The UK reported better-than-expected GDP growth of 0.5% for the third quarter of 2011 and economists simply suggested this was because the pain was not yet in the figures. House prices rose 1.2% in October, but this was – apparently – not cause for celebration because three-month figures were more revealing. It all begs the question – just what would it take to boost investor confidence? Admittedly, the recent economic statistics from the UK do not look exciting but, given the austerity measures, this was never likely. Economists have kept repeating the view that the prospects for the UK look grim – its major trading partners are in a mess, domestic austerity packages will depress growth and the much-vaunted private sector recovery does not appear to taking place as manufacturing data continues to weaken. But there comes a point when this becomes so consensual a view that it is a problem. The consensus has been, at best, an unreliable guide and, in most cases, wrong. It is difficult to find any economist with an alternative view on the UK economy to the one that it will be gloomy for the foreseeable future. Admittedly some have more faith in the stockmarket but, in general, the pessimism is relentless. Over the past year, defensive assets – blue-chip equities, investment grade corporate bonds and developed market government bonds – have all benefited from this pessimism, to the point where the majority now look reasonably expensive. This is certainly truer of bonds than of equities, but to some extent it applies across the board. In the meantime, more economically sensitive assets – cyclical equities in particular – have been sold off indiscriminately since the start of this year. Some fund managers have started dipping a toe back into cyclical areas in recognition of this trend. Yes, the momentum is with the pessimists at present, but not all the economic indicators are pointing in the same direction and those in expensive defensive assets may find themselves very exposed if the outlook turns out to be not so gloomy. For all your investment needs call Mark or Clare at GMP Independent Financial Advisers LLP 

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