Ashburton Reveals its Investment Outlook for 2010
Ashburton, the Jersey-based active investment manager, reveals its investment outlook for the coming year, in terms of overall asset allocation and strategy outlook, alongside views on Europe, the US, and Asia. Tristan Hanson gives a macro view on world markets and economies, whilst Veronika Pechlaner, Nick Skiming and Jonathan Schiessl focus on Europe, the US and Asia respectively.
The main themes for 2010 will be:
Global
· Economic recovery may be stronger than expected.
· Policy and country specific risks are rising in both developed and emerging markets.
· Equities are our preferred asset class, although the ride may be bumpier next year.
· Short-dated US and UK government bonds offer poor risk/reward characteristics.
· US dollar rebound is likely.
Europe
· Key themes will be government stimuli and death of cheap oil.
· Rail and diversified infrastructure will be sustainable beneficiaries.
· Capex spending likely to rise in private sector.
US
· Improving economic newsflow.
· Consumer confidence likely to start improving.
Asia
· Positive about the macro-economic picture for Ashburton’s core emerging Asian markets of China and India
· Japan now one of the few global markets offering real value
Tristan Hanson, Ashburton manager of asset allocation and strategy, commented: While the panic of late 2008 has now dissipated, the outlook for 2010 remains highly uncertain. One prediction we are confident of: 2010 should be a fascinating year for those with an interest in economics, government policy and the behaviour of financial markets.
By the standards of most years, the outlook for 2010 seems decidedly uncertain. While we share some of the concerns about G7 economic growth on a structural basis, we believe there is a major risk at present of ignoring the importance of cyclical dynamics. Even Japan managed brief periods of four per cent growth in the past 15 years, a period widely regarded as a prolonged recession. Our bias is to expect a stronger global economic recovery in 2010 than the consensus view of a subdued recovery.
There are several reasons for this: China and other emerging markets are now growing rapidly; a very large inventory cycle has only recently turned positive in the West; lagged effects of the unprecedented stimulus efforts are still to come through; and finally business confidence and corporate profits are improving – this is crucial to a revival in business spending and hiring.
We are not yet overly concerned about higher inflation, but we think markets may worry again about inflation in early 2010, and our expectation of upside surprises for GDP growth and rising headline inflation would suggest that concerns over tighter monetary policy (reduced liquidity in other words) may intensify. The consensus expectation of continued low interest rates into 2011 is perhaps the most likely outcome in the US or Europe. However, we believe there is a good chance that the market will doubt this view sometime in the first half of 2010.
In terms of equity markets, the implied equity risk premium remains high. Given our macroeconomic views, we believe equities will deliver the strongest returns of the major asset classes in 2010.
Within fixed income markets, we believe corporate and high yield bonds will deliver much more modest returns next year compared to 2009, but still outperform government bonds in the aggregate. Bonds are vulnerable to an upward shift in interest rate expectations and we expect US and European yield curves to flatten materially over the next 12 to 24 months.
Looking at foreign exchange markets, US dollar weakness has been the predominant trend since April and this may continue, so long as comments from the Federal Reserve remain dovish. But there are good reasons to think the trend of dollar weakness versus other developed country currencies will end sometime in 2010. The dollar is now cheap on a real exchange rate basis and there is a growing reluctance around the world to tolerate further dollar depreciation. Actions in Brazil (among others) and rhetoric from the likes of Europe, Japan and several other Asian economies suggest as much.
Furthermore, if the US unemployment situation turns around as we expect, then expectations for US interest rates may adjust upwards supporting the dollar. A rally in the dollar may precipitate gyrations across financial markets especially in commodities and emerging markets, although we would expect weakness to be temporary (if dollar strength were the main explanation for such moves). Within developed market currencies, the euro and yen are least attractive in our view.
On a medium-term view our preferred currencies are in Asia, especially the Indian rupee and Korean won. While several other Asian currencies look attractive on valuation grounds, significant appreciation is only likely to occur should China choose to allow the renminbi to strengthen, even if only modestly. This becomes increasingly likely as inflationary pressures rise in China, although the timing remains highly uncertain.
Veronika Pechlaner, Investment Manager, Ashburton's European Equity team, commented: For 2010 we see great opportunities in the two main thematic areas of the European Equity Fund at present, namely government stimuli and death of cheap oil supply, where relatively high visibility is paired with future supply bottlenecks and long-term investment cycles.
With a considerable amount of funds from the US stimulus programme actually not yet spent at this stage, the support will potentially last longer than the market is currently expecting – and we believe areas like rail and diversified infrastructure will see sustainable benefits from government spending programmes for a number of years to come. This combined with our expectation for continued strong demand for energy and basic materials out of China could trigger a revival in capital expenditure in the private sector at a time when inventories are still close to all-time lows and cost of capital arguments make investing for the next cycle attractive.
With Dubai’s recent experiences highlighting the continued risk in parts of the financial market we believe that the fortunes of different sectors will diverge more significantly over the next couple of months, something not unusual after an initial strong rally which indiscriminately benefited consumer and industrially exposed stocks alike. For 2010 we are positive on the areas of the market that offer sustainable earnings momentum backed by strong positioning in growing markets and balance sheet strength.
Nick Skiming, Investment Manager, Ashburton’s Americas Equity Fund, commented: We are looking forward to a continuation of the gradual improvement in news flow from the US economy during 2010. Whilst it has taken some time for the $800 billion stimulus package, ‘cash for clunkers’ and new home buyers tax credit to make an impact, we now anticipate an acceleration in the flow of positive news. Leading economic indicators have already turned up, but importantly the tide is turning for employment prospects and housing activity is also seeing some acceleration. Although we expect that the overhang of excess inventory will last throughout much of 2010 before a true recovery in pricing. However, these signs all point to a probable revival in consumer confidence.
Trying to connect US stock market returns to an improving economy is our biggest challenge and after this year’s huge rally from the March lows, many stocks are now pricing in much of this recovery. Initially, we expect corporate earnings to show a strong rebound entering the new decade. Easy comparisons for the first two quarters may well inflate investors’ belief that economic normality is returning. However, whilst markets shorter term may prove buoyant, we do have to hope that any further progress is not derailed by an early resumption in monetary tightening, choking the recovery off too soon in anticipation of growing inflationary pressures. At this stage we are optimistic that the authorities have learnt the lessons that Japan taught them in the 1990s, and the Americas Fund is therefore tilted towards growth, but importantly in businesses where strong balance sheet execution is in evidence.
Jonathan Schiessl, Ashburton Asian Equity Specialist, commented: Currently markets are displaying decidedly schizophrenic behaviour - these are uncertain times for equity investors as the pendulum swings from greed to fear and back again. The returns achieved for investors in emerging Asian markets, particularly China and India, are unlikely to be repeated in 2010. That is not to say we are bearish, just that you don’t get 70% plus returns every year. Japan on the other hand does look interesting after such a disappointing 2009.
For 2010, we are positive about the macro-economic picture for the core emerging Asian markets of China and India. China weathered the global storm remarkably well. We think economic growth will continue to accelerate in 2010 as the huge government stimulus actually reaches the real economy. This combined with an increase in private capital expenditure, a recovery in exports and continued strong domestic consumption should push 2010 GDP growth to around 8.5% to 9.5%.
Although the Indian equity market was severely sold-off during the crisis, the actual economy barely blinked. For next year, we are looking for further upgrades to corporate earnings and increased capital expenditure to drive the economy. India will be one of the first economies to begin tightening in Asia but we believe this will be done in a measured manner which the market should take in its stride.
Finally Japan’s a market everyone loves to hate and very few own. That has been the right call over the last year but Japan now is one of the few global markets offering real value. Japan’s titans have dramatically underperformed their global competitors and with the prospect of a weakening yen are looking extremely attractive. Expectations on the political front could surprise next year, leading us to become overall more positive to this perennial underperformer.
