Is it the end of the world for global markets, again?


Kevin Murphy

Kevin Murphy

Fund Manager, Equity Value

The 5,125-year-long Mayan calendar supposedly has the end of the world pencilled in for 21 December 2012. For a while, however, the financial markets and much of the media were convinced the end of the world would happen about a year earlier when, as the following chart from bank of America Merrill Lynch shows, sovereign bond yields for Ireland, Italy, Portugal and Spain had reached almost 12.5%.

Peripheral Europe* sovereign bond yields (%) 

*Simple average of Portugal, Italy, Ireland and Spain
Source: Bank of America Merrill Lynch Global Equity Strategy, Bloomberg, 4 October 2012.

The headline writers were in little doubt – the peripheral Euro markets were in dire straits, Europe was bust, the Eurozone would not survive, the politicians and central bankers were powerless to do anything and, all in all, it was a one-way trip to domino contagion. Yet here we are, one year further on, and yields have come in sufficiently far that they are now in line with their pre-euro-crisis levels.

People worry a lot about the future and can often feel whatever problems are facing the world are difficult – if not impossible – to solve. Nevertheless, history shows that many such issues indeed come to some sort of resolution – even the supposedly impossible ones.

In recent years the sub-prime crisis, the collapse of Lehman Brothers and the demise of Northern Rock have all been viewed in certain quarters as a potential trigger of Armageddon, but the world moves onwards – perhaps not as quickly as some might like, but onwards all the same.

Returning to the declining bond yields of Ireland, Italy, Portugal and Spain – though not Greece, which as we have observed before remains something of a special situation – it may be the policy actions of the European Central Bank and others have had an effect, perhaps a slight tick-up in the US’s macro outlook has made people feel more comfortable, or maybe the market’s ‘animal spirits’ have kicked in to boost investor sentiment.

Commentators can argue indefinitely about the precise causes, but there is no doubting the significance of the result. Put simply, sovereign bond yields represent the funding costs for nations and no one can fund sustainably at 12.5% – any country or company in the world would be bust if it had to do that – but at 3.5% one can.

So another problem with global implications – another supposedly insoluble one – may have been solved and, as long as the current situation remains, Ireland, Italy, Portugal and Spain ought to be fine. But of course the current situation will not remain. The future will change in unknowable ways and new problems will be created – and eventually sorted out. Even the very biggest issues of the day are often solved surprisingly rapidly because that is where everyone’s attention is focused.


Kevin Murphy

Kevin Murphy

Fund Manager, Equity Value

I joined Schroders in 2000 as an equity analyst with a focus on construction and building materials.  In 2006, Nick Kirrage and I took over management of a fund that seeks to identify and exploit deeply out of favour investment opportunities. In 2010, Nick and I also took over management of the team's flagship UK value fund seeking to offer income and capital growth.

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