Contrasting fortunes in Q3
The third quarter of 2011 provided very contrasting returns for government bond and equity investors. The former continued to deliver positive overall returns despite ongoing global debt concerns, with the equity markets taking the full brunt of persistent uncertainty surrounding the outlook for global economic activity and its potential impact on company earnings. The corporate debt markets also offered little respite in an increasingly uncertain world with high yield investments particularly badly affected in a ‘risk-off’ dominated market.

As the 4th quarter began, there was a continuation in the ‘risk-off’ mentality with equity markets in particular continuing to suffer in the face of investor concerns over the debt crisis. Undoubtedly the further knock to sentiment is causing concern at all levels – government, business and consumer and it is almost inevitable that the expected size and trajectory of economic expansion will be reduced as a result of the uncertainty over the political will and timing of any policy response.

Signs of improvement
Eurozone politicians have finally responded with a co-ordinated three pronged plan and there are already tentative signs that an improvement, or at the very least a stabilisation in economic data, is now evident. Key data points on the global economy are consistent with a slower but not collapsing global growth outlook and there remains no real sign of a 2008-style collapse because interest rates are much lower, US housing is not contracting any further, US unemployment is not getting worse, corporate balance sheets are in a much better state and both central bankers and politicians are now well aware of the issues, notwithstanding some appearing to be slower than others in their response to events.

Following the increased writing down of Greek debt, a planned recapitalisation of the banking sector, particularly in Europe, and an increase in the size of the European bailout fund, equity markets have already bounced off their early October lows. Additionally, were China to start easing monetary policy in the face of official inflation appearing to have peaked, this would also be a bullish sign and also providing support to risk assets are corporate results around the world, which continue to show resilience, with good dividend news adding to the improved optimism at the moment.

An attractive entry point?
In the face of a period of apparent respite for markets that might well last through to the end of the year, it is also worth remembering that the equity market – using the FTSE 100 Index as a proxy – has barely made any money for 14 years point to point in capital terms. Undoubtedly we are not out of the woods yet by any means but at least Europe’s leaders have now acted more decisively. If the measures do seem to be working now might not be the worst time to start reinvesting excess capital to equities at a time when dividend yields alone look compelling against alternative homes for cash.

Wary of government bonds
We remain a little concerned over the apparent lack of value that appears to be on offer in many government bond markets, preferring the corporate debt area and particularly high yield sectors which do seem well supported by good corporate fundamentals and where yields on offer are more attractive. With regard to commodities prices, these do appear up with short term events, if as we expect, the global economy does slow once again in 2012.

So we are a little more optimistic that the 4th quarter will prove a more positive one for investors than the third, but volatility will likely remain a feature for now with macro news still likely to dominate investor sentiment. In market terms, 2012 will hopefully be one which is more influenced by fundamentals than political issues, and in this respect there is some good value available in many parts of the market.