Ashburton Favours Asian Markets
While the current economic backdrop remains weak, the evidence increasingly points towards a global recovery in the second half of 2009. Among the more important developments, credit market conditions have continued to ease; there are signs of stabilisation in US consumer spending and home sales; manufacturing inventories have been run down aggressively; Chinese growth is accelerating; and global trade has picked up after a very sharp contraction. Rising equity markets themselves lend support to the prospects for recovery through their effect on consumer and business confidence. And while the stress tests conducted on US banks were criticised from several quarters, they have been effective in allaying investors’ fears regarding the solvency of the US financial system.
Given the scepticism that has so far greeted the current rally, many institutional investors remain underweight equities, we believe there is further upside potential as rising prices and generally better economic news force the remaining bears to capitulate. It is likely at some point that the long-term sustainability of economic recovery is questioned given various structural headwinds, e.g. high fiscal deficits, consumer deleveraging, but in the short-run we do not see this being the dominant market theme.
The composition of the remainder of the Asset Management Funds has shifted materially also. The duration of our bond holdings has been concentrated in relatively short maturities, but following a sharp bond market correction in May we have added a position in 30-year German government bonds and a 14% weighting in long-dated US inflation-linked bonds (TIPS). We believe the recent bond market sell-off provides an opportunity to buy these bonds at fundamentally attractive valuations, especially given the added diversification they provide in a balanced portfolio with significant equity exposure. In addition, we have added modestly to investment grade corporate bonds during the quarter.
In terms of currency strategy, sterling remains our preferred choice of the majors on valuation grounds, following a period of excessive pessimism on the UK economy late last year. We hold sterling in both our euro and dollar denominated Funds. In the very short-term versus the dollar, however, a period of sterling consolidation seems likely after a strong bounce. We also hold positions in the Taiwanese dollar and the Norwegian krone across the Funds, which we believe are individually supported by strong fundamental characteristics. We have held the krone at various points this year and discussed the investment case in previous articles. We bought the Taiwanese dollar in May as we believe it is materially undervalued on a real exchange rate basis and the improvement in economic ties with mainland China provides a catalyst for revaluation.
There are few certainties in financial markets, but the presence of collective emotional swings from “greed to fear” (and back again) is one. The extreme panic of late 2008/early 2009 set the stage for a powerful rally in risky assets. A certain amount of scepticism remains despite the massive policy stimulus in place, which suggests there is further upside to this move. Once it has become an overwhelming consensus that economic recovery will be “V-shaped” and that equities are the only asset class in town, then we will have to reassess our thinking. In the meantime, we maintain a generally positive stance towards risk but also continue to look for other cheap assets around the world as a source of diversified returns, such as US TIPS, German bunds and the Taiwanese dollar.
