Current Investment Climate
24 May 2012
CURRENT INVESTMENT CLIMATE
In the light of renewed market volatility, we would like to share with you the following summary of notes from our investment Managers:
After an unequivocally “risk-on” start to the year for global equities and credit, it appears we have again entered a “risk-off” period triggered by uncertainty in the Eurozone.
As markets have fallen, US 10-year Treasuries unexpectedly rose and yields once again declined to under 2% as risk aversion remained. Spain and its weakening economy influenced sentiment. Peripheral Eurozone bond yields remain high with Spanish and Italian 10-year debt at levels of around 6%.
While we hold the strongest conviction in our investment managers’ capabilities and we believe that the fundamentals of the investments held in our funds remain alive and well, at VAM we acknowledge that the next several months might very well bring about similar risk on/off, macro-oriented trading market environments like those of the past few years. Setting aside the usually culprits (e.g. potential slowdowns in U.S. and Chinese economic activity), there seems to be a new wrinkle unfolding related to the uncertain Euro saga. In the past, the market has mostly forced policy decisions on governments and policy makers. Now, it appears that it is the “people’s” turn to force some decisions (e.g. the election of Francois Hollande as the first Socialist president of France since the Mitterand years and the failures of the “pro-austerity” political parties in Greece). Very clearly, the heavy dose of austerity is not sitting well with many folks in Europe and many are now seemingly flexing their muscles through their right to vote. The global markets may not like their decisions, which is why the markets may trade lower and with higher volatility in the months to come.
Notwithstanding the above points, we are observing some encouraging differences between the current economic environment and those of the last few years. For example, recent data suggests that the U.S. housing market is firmly stabilizing whereas there appeared to be no firm bottom in sight for home prices in the past few years. If this stabilizing marks a bottom in housing, this would have positive implications for future U.S. Gross Domestic Product, employment and household wealth. Additionally, commodity prices are lower than they have been in past years which should be relatively supportive to economic growth, all else being equal. Finally, many emerging markets are far more accommodative in their current policies than they were in the past few years and many such countries find themselves in the enviable position of having inflationary pressures abated and the ability to stimulate their economies on both monetary and fiscal grounds.
Note there are some encouraging similarities between the periods, too. Corporate profits remain strong and by many measures, global equities are not expensive relative to historical valuations. Additionally, the developed world central banks still do not seem to be close to ending the period of exceptionally loose monetary policy. To the contrary, it remains plausible that a significant deterioration in the economic data might lead policymakers to ease further yet again. In the post global financial crisis world, these additions of liquidity have largely been supportive to equity returns. So in summary:
- The outlook, especially in the US and Emerging Markets, is basically sound and positive, despite Eurozone uncertainty.
- Equity market fundamentals are currently being overruled by Eurozone uncertainty.
- Bond markets are once again being pushed up by the same uncertainty.
- Commodity markets, like equity markets, are being lead by current issues rather than fundamentals.
If anything, the current markets offer an opportunity for rebalancing into equities at reduced prices. For those who do not have the appetite for increased equity exposure, Broadgate through VAM funds offers 2 bond Funds which are both positioned very conservatively in the current climate.
The information set out herein has been obtained from various public sources and is by way of information only. Broadgate Financial can accept no liability of any sort in relation thereto and readers should obtain their own verification of any statement before making any decision which may have any financial or other impact.
Neither the information nor the opinions herein constitute, or are they to be construed as, an offer or a solicitation of an offer to buy or sell investments.