Analysis: Another tumultuous year looms, but don't panic

Wed Dec 14, 2011 1:36pm EST
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By Mike Dolan

LONDON (Reuters) - The looming new year may well bring as much financial turbulence as tumultuous 2011 but global investors reckon "panic" is no longer an option and just protecting your money will require taking on at least some risk.

For all this year's left-field shocks -- the euro sovereign debt and banking minefield, an unprecedented U.S. credit rating warning, Japan's earthquake, the Arab Spring uprisings -- investors have not gone to ground in quite the same way they did at the height of the credit implosion in 2007 and 2008.

That's not to say extreme "risk off" valuations that have seen top-rated government debt yields drop below equity dividend yields have not persisted and grown, even as sovereign bonds were deemed riskier and the AAA status of the United States and Germany have been threatened by credit-rating firms.

Rather this pricing has happened without the same sort of panicked market dislocation that saw a wholesale retreat from investable assets and dash for cash three years ago.

"It is frightening that these valuations can be reached in a cold and calculated manner. We have seen none of the previous panics, nor the correlations of almost all liquid and tradable assets in a scramble for cash," said Jim Wood-Smith, head of research at British wealth management firm Williams de Broe.

This shows investors need to remain invested even though nervous of macro-driven index volatility and the prospect of real losses in cash or sovereign debt over a protracted period.

It's one thing descending into the bunker to see out an air raid, it's quite another to live down there for a decade.