Importance of Consistency and Risk Premiums

In looking beyond the high fluidity of the current day capital markets, we underscore the importance of consistency and risk premium assessments. Now may be the first signs of a healthy re-emergence of skepticism. It is reflected in the Irish debt imbroglio with implications as significant as that of the Thai breakdown in the 1997/98 Asia crisis and in concern about Chinese policy tightening relative to the long dated rise in commodity prices. It is reflected in the rise in long dated sovereign bond yields alongside equity volatility just after the US Federal Reserve announcement of a second round of quantitative ease. In the ongoing credit crisis, transparency, liquidity and valuation are likely to remain core issues for investors.

Consideration is needed of appropriate levels of risk premiums after markets that since March 2009 had basked in eighteen months of acquiescence to government largesse as source of succor. Such considerations apply to advanced country markets weighed down currently by slow economic growth and to emerging country markets hitherto buoyant on hot money flows alongside strong economic growth. They are also likely to apply more broadly than being recognized, to sectors and for individual companies. We believe quality of management of operations and of financial structure are likely to be of the essence, heightening the importance of revenue growth. We believe to be rising in importance the consideration of appropriate risk premiums for the long term, based not on present long government bond yields but instead on free market levels on an inflation base of 2%.

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