Perspectives

Seasonal patterns for the last four years have suggested a period of economic slowdown during the middle two quarters of the year, bringing about a corresponding decline in government bond yields and a drop in risk asset prices. This time, though, it might be different.

At Newton, we believe our use of themes is invaluable in helping us to gain perspective on the important risks and opportunities in investment markets.

Another late-night meeting over a weekend resulted in a last-minute deal for Cyprus. The best that can be said about it is that it is better than the one the previous weekend, but the side effects may still be worrying over the longer term.

At first glance, perhaps there is little in common between the Hundreds Years' War between France and England and the current deleveraging phase in financial markets. We are certainly not going to suggest that they will be measured over the same time frame, but there are some similarities we can identify and analogies we can draw.

Against a backdrop of deleveraging (debt reduction) in much of the developed world, we anticipate lower returns and greater volatility in financial markets in the years ahead. We believe these characteristics count strongly against passive approaches to investment.

The actions of policymakers to avert the worst possible consequences of the global credit crisis of 2007 amount, we assert, to a form of 'financial repression', interfering with the free-market pricing of debt and currencies.

Dennis Turner is former chief economist of HSBC. He spoke at our annual investment conference in November, and we caught up with him again at the beginning of the year to ask him about the outlook for the global economy.

At our annual investment conference in November 2012, Simon Pryke, our chief investment officer, and Charles French, our global financials analyst, presented a session entitled A perspective on returns, which brought up to date the ideas we discussed in our paper of the same title at the beginning of 2012. In this article, we provide a summary of the session and explain why we believe a new perspective is required on investment risk and return. We explore the distortions we believe are inherent in financial markets and their implications for investors.

Since the credit crisis in 2007, equity markets have started each new year with optimism about economic prospects, prompting calls for the mythical "bond vigilantes" to show their colours by dumping government bonds.