My Sipp: piloting my portfolio through conflicting market forces

Wherever we look markets and policy makers seem caught in the grip of opposing forces. Rob Kyprianou explains what this means for his self-invested personal pension.

Markets and policy appear afflicted with schizophrenia as we transition between different phases in this economic cycle of crisis.

Phase 1 was focused on rescuing banks and banking systems with bail outs, quantitative easing, massive injections of capital and liquidity, coupled with fiscal stimulus to mitigate the economic effects.

Now we have entered phase 2 with the focus shifting to economic recovery, the need for fiscal consolidation and the redefining of the post-crisis banking system in the West. This is not a straightforward transition, with different interpretations as to how this will play out for markets.

The ‘Triple D’ school ...

On one side of this debate are the 'Triple D' – debt, deficit and deflation – school. This school can be heard in the form of various siren calls:

• the double dippers warn of a fall back into recession, a product of fiscal consolidation, deleveraging and weak banks;
• the Japan syndrome advocates who warn that deflation inevitably follows a busted banking system and overinflated asset prices;
• or the age of austerity soothsayers, typified by asset manager Pimco’s vision of the new normal where de-leveraging, de-globalisation and re-regulation implies slower growth and lower returns on financial assets.

... versus the Bulls

In the other corner are the bulls with their own armoury of arguments.

• The monetarists among them point to unprecedented monetary easing in the West that inevitably must spur not only growth and profits but also potentially inflation.
• The structuralists talk of fundamental shortages, principally of food and commodities that will push prices higher.
• And the new locomotives point to debt-free emerging economies, mainly in Asia, as the new consumers that will lead global growth recovery.

Wherever we look we see evidence of this confused thinking: