LONDON, March 1 The global financial crisis is clearly far from over but few long-term investors feel we are back to square one either.
The current situation might be best summed up by filmmaker Orson Welles, in a famous quote cited by Brown Brothers Harriman strategist Mark Chandler this week: "If you want a happy ending, that depends of course, on where you stop your story."
The final week of February was a jarring wake-up to anyone who believed 2013 would see a straight-line financial and economic recovery. After a stellar January for global stock markets and a 12 percent surge from November's troughs, they have just clocked four straight weeks in the red.
As the events blamed for the pullback could hardly have caught anyone unawares, the tumble suggests markets got overcooked in January.
Italy's inconclusive election casts more doubt on the euro zone's austerity-led solution to government indebtedness, and on popular acceptance of the supposed fiscal conditions attached to any European Central Bank bond-buying backstop.
But few had expected a clear-cut outcome to the poll, and the dour public mood had been well flagged.
Britain's loss of its triple-A credit rating as a possible triple-dip recession looms showed the problems are by no means confined to the euro zone, but it too had been expected by investors for months.
Even though the triggering on Friday of automatic U.S. spending cuts could technically be sidestepped if politicians can find a balance between capping debts and sustaining growth, no one can claim surprise at the deadline.
Offsetting these negatives are persistent, if hesitant, signs of a modest global economic upswing while western central banks keep interest rates near the floor and some consider more money-printing or even easier credit to kick-start lending.
But with total returns indices on Wall Street and on Britain's FTSE at record highs, has someone miscalculated?
Part of the answer lies in whether you're a short-term tactical investor looking to generate returns by timing market ebbs and flows, or one that plans to face down volatility by buying and holding to average out in the black over time. These days, asset management firms and even pension funds tend to be a mixture of both.
Predictably, the former have been rowing back since the beginning of February - helping erode January's equity price surge, inflating Italian yields and cutting those on 'safe haven' government debt, and raising volatility. But are more patient players getting nervous?
MARGINAL FLOWS TILT POSITIVE
Reuters latest asset allocation polls for February show that even after January saw the biggest one-month increase in equity allocations in the survey's record, average percentage targets nudged still higher, to 10-month peaks.
And few of these longer-term players seem poised for an about-face yet on their strategic view of gradual if slow and grinding reflation - even accepting renewed volatility in the weeks ahead from Italy, the euro zone or Washington.
"We acknowledge the clear risks facing markets at the moment, but choose to stand our ground for now and remain overweight in equities," said Valentijn van Nieuwenhuijzen, Head of Strategy at ING Investment Management.
Van Nieuwenhuijzen reckons the shift in investor behaviour over the past six months will be hard to shake. He said marginal flows at least will continue to move towards risk and growth, while a breakdown in correlations between assets will allow more micro considerations in favour of top-down macro trading.
"We still like equities despite this year's rally and an abundance of risks," Citi's asset allocation strategists told clients. "On balance, a world of easy money, low bond yields and attractive equity valuation trump concerns about systemic risk."
The mood still resonates with the 'Great Rotation' theme advocated by Bank of America Merrill Lynch strategists.
Even if data on actual flows to support that direct switch from bonds to equity remain equivocal, developed market equities are up more than 6 percent year-to-date while U.S. Treasuries and German bunds remain in the red.
But this is not optimism just for the sake of it. Even stubbornly positive long-term players acknowledge the big picture landscape has been indelibly altered over the past five years and a lower-return horizon now prevails.
In a report this week, consultants McKinsey took a standback view of the crisis to assess the damage. It showed annual growth in financial assets has almost stalled, to only 1.9 percent since 2007 versus 8 percent over the prior two decades.
Cross-border flows, meanwhile, have collapsed about 60 percent since 2007 to some $4.6 trillion, with Europe accounting for more than two-thirds of the shrinkage.
"We conclude that some of these trends are a healthy correction of pre-crisis excesses, but if they continue, the world faces the risk of slower economic growth," they said.
Long-term investors themselves could provide one solution by changing behaviour, however.
"With banks in a deleveraging mode, this could be a pivotal moment for institutional investors, whose pools of patient capital could finance infrastructure and other types of investment," McKinsey said, adding that policy could encourage greater harvesting of "liquidity premiums".
With households and markets likely to remain skittish in the short-term, sensible long-term planning by companies could also help foster growth and a more stable investment horizon.
Worryingly, their visibility too appears very restricted.
Citing a survey of 500 chief financial officers, consultants Oliver Wyman this week said more than half now said they have more difficulty assessing future risks to earnings than before 2007 and more than 80 percent see this as the 'new normal'.
But the survey's authors said better management of these financial, policy and geopolitical risks could stabilise growth among more robust companies and ensure business models are sustainable even with economic growth on a lower trajectory.
More than half of respondents claim their response to the uncertainty would be to raise revenue targets and increase their global footprint, while about 40-50 percent planned higher capital expenditure, new products or mergers and acquisitions. (Editing by Catherine Evans)