We are in a changing environment for investing. Three years into a protracted deleveraging cycle, investors should expect the landscape to shift significantly, together with rising levels of volatility.
Correlations are changing. No longer are all asset classes moving in unison, as highlighted by the recent relationship between equities and bonds breaking down. Importantly, there has been a healthy dispersion of returns across regions, sectors and by market cap. This means that portfolio construction is critical — selecting exposure to sectors and styles, rather than necessarily picking equities over bonds, will drive returns.
Signs of declining and contained inflation, very low developed and lower emerging-market interest rates are encouraging. Central banks in the developed world are likely to maintain their supportive policies for the foreseeable future. Combined with China’s recent easing of banks’ reserve ratio requirements, the picture leads to a stimulative monetary backdrop, with inflation less of a concern in the short term. Patience is required but the macro environment points to significant upside in equity markets.
The route to recovery is by no means straight-forward. We are likely to see global economic growth stutter, not assisted by the “double dip” in the UK, the precarious situation in Europe and geopolitical risk, with Iran the wild card. The trajectory of growth is broadly on par with what historically would be considered a normal recovery. In time, the fear will disappear from investor minds. There is good news at the corporate level. Recent company earnings, especially in the US have provided a good underpinning for markets. In the UK, valuations are reasonable and the market has quality companies with good cashflow and the ability to pay dividends. We also expect to see firm commodity prices as most, apart from gold and oil, faired poorly in 2011.
We are positive about most risk markets and in particular equity markets. Setbacks should be used as buying opportunities, but the style of exposure will be key to returns.
Paul Mann recently joined Eden Financial as an investment director after heading the UK Private Bank at Bank Hapoalim