Ashburton : Weekly insights update
We scaled back equity exposure modestly across our Multi Asset Funds at the end of March in anticipation of choppier conditions in markets. It had, after all, been plain sailing for the early part of 2012
The first days of April have already been challenging with various segments of the equity market posting sharp declines (e.g. European banks -6%, Japan -5%, US banks -3%). Net equity exposure in our largest Multi Asset Fund, the Asset Management Fund, stands at 30% currently (or 33% including dividend futures).
Market concerns over Chinese growth have clearly grown in recent weeks, while in Europe the sugar rush of the ECB’s 3-year lending binge has temporarily worn off as focus has again turned to Spain’s budgetary problems. A weak US unemployment report on Good Friday – the US economy only added 120,000 jobs in March versus an expected gain of 205,000 – has further dented sentiment in the short-term.
The weaker US employment report was disappointing but its importance should not be exaggerated, in our view. Monthly jobs data is notoriously volatile and other indicators such as weekly jobless claims are pointing towards a steadily improving labour market. Overall, we continue to expect the US economy to register reasonable (but not rapid) growth and individual data points to fluctuate around this gradual growth trend - some stronger, some weaker.
In the coming weeks, there are a number of near-term events that will keep market participants and journalists busy, such as elections in Greece and France as well as the first quarter corporate reporting season. The expected deluge of newsflow has the potential to create short-term noise and volatility, hence our slightly more cautious stance at present.
Our medium-term views are unchanged. We believe equities are attractively priced relative to cash and fixed income assets and will outperform over the next few years, although periodic corrections are to be expected. Provided our underlying economic views do not change markedly, an abrupt sell-off in equities may create an attractive buying opportunity.
The week ahead...
On the economic data front, Thursday’s US jobless claims and Chinese macro data (expected 13th April) are the highlights. Chinese Q1 GDP will be released (consensus 8.4% YoY) along with industrial production, investment spending and retail sales and investors will be looking for signs of just how much the economy has slowed. US inflation is released on Friday afternoon, which may influence the probability the market places on the chances of QE3 from the Fed.
On the corporate front, US quarterly earnings announcements ‘officially’ kick off this week. The consensus bottom-up analyst forecast has Q1 earnings flat on last quarter and up 5% on a year ago (source: S&P). However, 27 companies have already reported with 22 of them beating analyst forecasts (source: S&P).
