Much as euphoria and complacency over risk drove the market cycle into 2007. As is classical after a blow-off, the last sector to be in vogue has to undergo restructuring. In the current context, finance was one such worldwide. With trials and tribulations still at work not least in finance, we anticipate equity markets will endure wide point moves but be range-bound into mid- 2012. Recent economic projections such as from the OECD indicate global growth at a knife edge. So far, risk premium readjustment has been particularly severe in sovereign bonds. While recent behavior in fixed income was initially to favor US Treasuries and German bunds as safe havens, more recent developments there have been less favorable, at the margin. We anticipate that for even a modicum of normality to be seen to have developed, yields such as those of peripheral Europe would need to sustainably decline from current levels with arguably 350 basis point spreads being considered reasonably complete normality. For these reasons, we focus assessments on the financial sector and on political developments as being in interaction for at least several months. As is being indicated now by corporate finance focus on internal cash flow amid liquidity constraints for instance in Europe, the investment environment is likely to be more favorable worldwide for companies with business leadership and strong balance sheets.

Changes markets can believe in are still unfolding. Notwithstanding contrary protestations that events ranging from lower earnings and/or myriad expectations as well as political stress have been incorporated, the market reality appears closer to that of belated response. Our assessment is that the global landscape has changed and acceptance of such has lagged. It does not stall asset allocation – and cash remains a legitimate allocation. It does mean that more likely to be fraught with risk are both extremes recently in favor, namely at one end reliance on liquidity and at the other end, reliance on value as measured by expectations of return to valuation expansion. Beyond crisis riven peripheral Europe, the tepid results for the latest auction of German government bunds, are likely a significant indicator of cracks in the simplistic view that liquidity alone could drive investing behavior. Far from the conventional current view of liquidity and crisis favoring low Treasury yields, the breakdown without consensus from the U.S. Congressional super committee on deficit reduction should be regarded with concern. Reduced potential enunciated from Brazil to Singapore, decline in industrial activity in China and of inflation in India indicate more not less pressures on governments there. Our favored portfolio route in equities, in fixed income and for that matter investments in general is to incorporate bifurcation that is still extenuating. Far more than liquidity or value as drivers, it is crucial to discriminate based on quality of execution in public and private finance as well as over growth of growth.