Sterling, Europe and Redemptions

Whilst I can see no real reasons for buying Sterling it has to be admitted that the precipitous fall over the last few months might be rather an over reaction to the UKs woes. There are many Euroland members who are in pretty much the same, or worse, situation as the UK.

The power of nations such as Germany and France could withstand the effects of such a strong currency but for Italy, Spain and others the effects can only be described as disastrous. By population these are huge nation states and have experienced a reputed fall of over 30% in productivity levels versus Germany since the start of the Euro project. A strong currency may well be the last straw for much of their manufacturing sector.

There seems to be a sort of the worst is not over but we know what it will be filtering into the markets at the moment. Much of the bad news is now being discounted before it even arrives.

Last year I was asked when was the bottom going to be reached? My answer was to the effect, When bad news no longer causes major falls, that will be the turning point.

It is quite certain the real pain for the UK has not yet even started. Yes there have been layoffs but most of these will have been with reasonable pay outs. The money has not, yet, run out. The credit cards can still take the strain. The pain will really hit home when no work for three months turns into no work for six, seven monthsa year.

Retailers, who have cried wolf so many times over the past decade still seem to be hoping for some kind of turn around. Total retail floor space continues to increase at an incredible rate which does not bode well for returns over the next year or so for existing space.

For longer term equity holders we are also running into the aging population effect. A greater and greater percentage of the populace is tipping over retirement age which generally means equity redemptions rather than equity purchases.

The up and coming generations may have precious little remaining to invest or save. At the same time, enormous deficits are being created.

Back in the late nineties I wrote quite a big report on the fact that after 2006 there would be a difficult period for all the developed nations markets as redemptions might start to outweigh savings. This was, of course, slightly simplistic but contained a small grain of truth.

So it might be time to invest if the markets continue to ignore the constant bad news. Of course, if redemptions gather pace then you may be better off spread betting on the markets to go down. Personally, I am going to sit this one out and wait for the next song.

Note that financial spread betting carries a high level of risk and may not be suitable for all classes of investor. Only trade with money that you can afford to lose. Make sure you fully understand the risks involved. If necessary, seek independent financial advice.

About the Author

Daniel Jones is a seasoned spread trading professional and commentator on some of the leading financial spread betting sites like Clean Financial.

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