All of the points discussed in our Autumn 2010 edition of ZPI Quarterly have now become front page news, with much of it focused on whether the Eurozone will allow Greece to default on Government debt rollover. The current likely scenario is Greece will renegotiate its debts by repaying less than full outstanding value in a structured manner – current Greek debt instruments are currently priced at less than par (face) value, indicating that the market has already accepted this fact.

It is now emerging that Europe may enter a period of extended stagflation, with the possibility of upwards to a decade of little or no growth. Japan is an obvious parallel – it is yet to record sustained growth following the bursting of the Japanese bubble in 1989.

The mess in Europe has distracted from the massive sovereign debt issues in the United States. Incredibly, the US Dollar has rallied as a perceived “safe” haven.

Slowing world growth clearly has an impact for the Australian economy, but growing internal consumption within China, India and South East Asia should produce enough stimulus to the Australian economy to record sustained growth levels over the next half decade of around 3% per annum – up to three times that of the rest of the developed world.

It is absolutely critical that investors view their investments through the prism of the new, long term, global realities. Gone are the days where easy year on year high percentage returns will be gained. Expectations need to be modified to reflect changed circumstances.

If ever there was a time in recent memory to not “put all your eggs in one basket”, now is that time. Simplistic reactions to overweight cash and term deposits – or overweight shares as valuations fall – will simply overweight risk. It is still less than two years since the Federal Government was so concerned about the risks to our banking system that it felt compelled to guarantee bank deposits (and the retail guarantee is yet to be withdrawn). In global turmoil, there is no place to hide.

Investment quality remains paramount, but its spouse in this environment is diversification. Whilst always preached through ZPI Quarterly, diversification is now more important than it has ever been, as all asset classes and sectors experience wild swings – and the ever increasing risk that some part of the financial system may actually fail.

Inevitably, diversification will mean parts of a portfolio will over perform, and others under perform, relative to the rest of the portfolio. Rather than focus on underperformance of parts of the portfolio as a result of diversification, the diversification itself should be seen as an insurance policy – the cost is some underperformance in parts of the portfolio, whereas the benefit is the security of knowing whatever the world economy throws at your portfolio you have maximised the likelihood of maintaining your overall portfolio value.