European economic decay is getting a little worse each day. In a few weeks’ time, the Greek public will have their say at the ballot box for the first time since the crisis began. Failure of any one party to win a clear majority would merely exacerbate a situation that is already inextricable. But is this not likely? It seems reasonable to believe that a sovereign default, orderly or otherwise, has to a large extent already been priced in. Now headed by the pragmatic Mario Draghi, the ECB has, with the success of its three-year refinancing operations for Eurozone financial institutions, ensured that such a crisis (Greek, Portuguese, etc.) will not result in a bank liquidity crisis. In this respect, the ECB’s quantitative monetary measures have been successful. A minor success, though, as banks have essentially used this low-cost financing to purge their balance sheets and reinvest the cash in sovereign debt issued by their own countries, bringing about a sharp (but not necessarily long-term) drop in the cost of borrowing for countries like Italy and Spain. Meanwhile, the portion allocated to financing the real economy remains very small.

• AS IT IS, ONLY AN EFFECTIVE LINK BETWEEN MONETARY POLICY AND THE REAL ECONOMY COULD EVEN PARTIALLY OFFSET THE MASSIVE, WIDESPREAD FISCAL AUSTERITY MEASURES TAKEN THROUGHOUT EUROPE.

  • Because without growth, there can be no salvation for deficits and debt. This is already the case for countries that have not suffered major imbalances such as the Netherlands; it is obviously much worse for the likes of Spain, Portugal and Italy. It would be naive to imagine that deficit reduction targets can be met without growth or inflation. Can monetary policy find a way in to the real economy through the Spanish banking system? We doubt it. Can domestic demand hold up with unemployment at 23% and climbing? European businesses suggest not as their orders from Spain are plummeting. Quite clearly, budget targets will not be reached in the Iberian peninsula or in France for that matter where uncertainty surrounding the presidential election continues to be fanned by a depressingly futile political debate that completely ignores the challenges faced in changing our model of society, as is necessary.

• THERE ARE NUMEROUS PITFALLS IN THE EUROPEAN ECONOMIC LANDSCAPE.

  • Only Germany is still showing signs of life with a solid labour market and seemingly unshakeable business leader confidence, judging by the index published by the IFO institute in Munich. Let us hope that the election in North Rhine-Westphalia will not weaken Angela Merkel’s coalition, without which governance of the Eurozone would become problematic over the coming weeks. The Eurozone will surely not implode but the ECB will not step in again unless there is a major crisis. However, the Eurozone economy remains the major global risk for a portfolio manager. Eurozone equity markets are therefore the greatest risk factor for the stock markets and this could lead to an increase in risk aversion. We are consequently selling Eurozone stock index futures to tactically reduce our equity exposure.

• IN STARK CONTRAST WITH THE SITUATION IN EUROPE, THE US ECONOMY IS EXPERIENCING HEALTHY GROWTH, WHICH SHOULD REMAIN AROUND ITS CURRENT LEVEL.

  • We are not getting too excited as it is still only around 2% but compared with potential medium-term growth of 0.6%-0.8% for the Eurozone, the figure is flattening and above all it suggests a different outcome to the deficit and debt problem. Since gathering pace in 2009, US growth has been largely driven by corporate earnings (companies restructured quickly and are now hiring again), investment (through tax incentives, which are so dearly lacking in the Eurozone) and exports (competitiveness has returned as the dollar has fallen by 10% to 15% against major currencies since the beginning of the crisis). Lastly, the economic recovery has nothing to do with an excessive rise in asset prices, whether in real estate or on stock markets.

• BEN BERNANKE, WHOSE ACADEMIC GLORY RELATES TO HIS STUDY OF THE 1929 CRASH AND IMPACT OF PREMATURE RATE INCREASES DURING THE EARLY STAGES OF RECOVERY, IS KEEPING HIS FINGER ON THE QUANTITATIVE EASING BUTTON.

  • He will make sure there is enough liquidity and continue to manipulate the whole of the yield curve. But for how long? Apparently, for as long as unemployment remains high and the property sector is not showing any clear signs of picking up. On this last point, we should not be too pessimistic. Prices are rising in some states. Moreover, the fall since 2006 tallies with the average for major property cycles, while the banking industry is faring better than it is this side of the Atlantic. One last point but an important one for the US economy: the United States is becoming much less energy dependent and in a few years’ time this will make the country even stronger, especially as it holds substantial shale gas reserves, thought to be as big as China’s.

• CHINA IS NOT ON THE BRINK OF COLLAPSE AND ITS ECONOMY WILL NOT SUFFER A HARD LANDING BUT RATHER GROW BY AROUND 7%-7.5%.

  • In a year of political transition and with the European situation making international conditions tougher, this is perfectly reasonable. You may think that we are remaining stubbornly optimistic about the Chinese economy but a trip to six of the country’s provinces by our fund managers during the first quarter to meet business leaders, migrant workers and university students, to visit urban areas and travel on intercity transport, gave no indication of imminent economic collapse in China. The beginning of the year may have been slower but we must remember to look at volumes, especially for consumer spending, as it is the sharp drop in inflation that is heightening the impression of softer growth. Regarding property, while central government is remaining firm as regards luxury real estate (even if figures have been encouraging since the Chinese new year), there is a need for social housing to be developed on a massive scale. This is all the more true in light of reform of the ‘hukou’ system, which gives migrant workers permanent residency rights. Out of an urban population of more than 600 million, nearly 30% or 200 million do not yet have a residency permit. It will be up to the next government team to implement important reforms, while reducing inequality is the most common demand from students but there are many others relating to the financial sector, the tax system, a drive to decrease the weight of the public sector and a reduction of conflicts of interest between local officials, etc. This period of transition for the Chinese economy must not be allowed to hide the fact that although growth may be slowing a little, its pace remains enviable and given China’s current weight in the global economy, it is generating quite a considerable increase in the volume of demand, meaning we can still find investment opportunities with considerable potential.

    World growth remains asynchronous with pitfalls and other hurdles are dotted along the way, but there is still some potential left in equities, which remain reasonably valued. We have created a Patrimoine range, which combines bond/currency and equity performance drivers in Europe (Carmignac Euro-Patrimoine), emerging markets (Carmignac Emerging Patrimoine) and international markets (Carmignac Patrimoine) to appease fears and inspire hope. In a world in which the markets’ tempo can be hard to determine, we will continue to manage short-term risks in a way that keeps our investments firmly focused on our strongest convictions.