By Mike Dolan
LONDON Nov 9 Battle-weary investors heading
into another intense and market-sensitive period of political
brinkmanship in Washington may do well to consult their European
While the two years of attrition in European markets may not
be a blueprint for victory per se, they may provide some clue as
to how investor minds better equipped to deal with hard data and
mathematical models should navigate political minefields.
Global money managers in the United States and around the
world have for years expressed frustration and dismay at the
inability of Europe's fractious political and national elites to
find a silver bullet to end the euro sovereign debt crisis.
The economic and financial solutions are there, many argued.
Only political infighting, partisan positions and ideological
posturing stood in the way of key compromises to stabilise the
bloc and neutralise the systemic threat to the world economy.
That sounds mightily familiar to anyone trying map the next
six weeks of U.S. political negotiations to sidestep the looming
"fiscal cliff" - which, in the absence of a deal, could see
about $600 billion of expiring tax cuts and automatic government
spending cuts shock the world's biggest economy back into
Figure out exactly how freshly re-elected Democratic
President Barack Obama and his opponents in the still Republican
House of Representatives thrash this one out and you you'll be
But no one's 100 percent sure how this will go, or at least
the precise timing of it. The risks of failure -- however large
or small -- are obvious. And what of temporary failure or delay?
What about kicking the can down the road again?
A Reuters poll on Friday showed most economists believe an
agreement will be reached before the deadline but that partisan
bickering beforehand could damage the economy.
"It remains our view that a compromise will emerge as
neither side wants to be blamed for plunging the economy back
into recession," Keith Wade, chief strategist at Schroders said
this week. "The difficulty is that time is limited. Given what
we have seen in the past and in Europe today, politicians will
want to take any agreement to the wire."
For long-term investors trying to see through the fog, how
do you retain your nerve or conviction about the eventual
outcome during weeks of stomach-churning market moves as
negotiating positions are relayed via alarming news headlines?
This has been the playbook in Europe throughout the euro
crisis to date -- a "war" that's far from over given this week's
latest anxiety about Greece, the unresolved issue of a sovereign
Spanish bailout and signs of sharp German economic slowdown.
Long-term investors typically had four main options:
1) Avoid the euro zone altogether -- nigh-on impossible for
massive euro-based pension and mutual funds if not the biggest
2) Seek safety internally within the bloc's perceived safest
havens, such as German debt.
3) Take a medium-term view of the outcome that allows you to
you pick up short-term pricing anomalies and wait for
overwhelming policy response.
4) Tactically play the ups and downs.
This year at least, those who even could have avoided the
euro zone completely may have had lower blood pressure and a
decent year on Wall Street or in emerging markets so far but
they would also have missed some very big euro moves indeed.
Total returns on are up more than 60 percent in Portugal's
10-year government debt, more than 30 percent in Irish
equivalents, 23 percent in Italian benchmark bonds, and even up
2 percent for the asset in eye of the current euro storm --
Spanish 10-year paper.
Given the euro is basically little changed against the
dollar since January, these would not have needed currency
hedges for most overseas funds either.
Investors who stuck to a medium conviction the euro would
survive intact, and that policymakers would eventually do all
necessary to support it, would have had a relatively good year
to date despite all the apocalyptic commentary.
As for the internal safety trade, once again, the anxiety
conscious may have been happier with less than 7 percent returns
on 10-year German bunds, but that has been less than a third of
the 20-percent-plus returns on German equities.
For trend-playing tactical traders? Well, if hedge funds
specialising in macro trading strategies like this are any sort
of proxy for that, then that was possibly the big one to avoid.
Hedge funds, who typically charge the largest fees, have had
another miserable year with average returns of just 4.3 percent
-- according to Hedge Fund Research -- but average macro
strategies are actually down 1.3 percent year-to-date.
So what are the lessons for those looking at weeks of fiscal
cliff angst stateside? Playing the panics and second-guessing
daily trends doesn't appear very fruitful in this environment.
Avoiding U.S. assets altogether is much less of an option,
not least because global markets tend to correlate more highly
Wall Street gyrations anyway.
The temporary safety trade of U.S. Treasuries looks the
easiest call for the risk averse but only for those who are
increasingly yield averse too. Mainly for those in search of
temporary bunkers during thinning year-end markets anyway, this
week's moves show that strategy is the default move.
But if, just like opinions on euro zone survival, you
believe the U.S. cliff will ultimately be avoided by some form
of compromise, then many may simply close their eyes to the
headlines and day trades and look at equity market lurches like
this week's as potentially big buying opportunities.
And that appears to be where most asset managers appear to
sit -- whether that's a complacent consensus or not.
"The fiscal cliff may turn out to be just a distraction. If
just a short-term solution is found to the problem, markets
should recover fairly quickly," said Dan Morris, global
strategist at JPMorgan Asset Management.
"If tough negotiations lead to a drop in equity markets that
should be viewed as a buying opportunity."