ABSOLUTE BEGINNERS
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GETTING OLD WHEN YIELDS ARE ZERO
Diversify in Emerging Markets says Mark McFarland, Chief Investment Strategist, Private Banking, Emirates NBD. Perhaps the most important development recently wasn’t the failure of markets to move higher or the revelation that up to seven regional governments in Spain are now in need of funding but in fact it was the announcement by the California publicsector pension fund CalPERS that its annual investment returns to 30 June 2012 were far below expectations. Over the next 10 years it’s going to be a challenge for traditional investment plans to earn the returns their sponsors were projecting. From an investment perspective, the results from CalPERs are a wake-up call for all since they are symptomatic of the ill effects of quantitative easing – the depression of inflation-
adjusted long-term yields to (somehow) stimulate long-term growth and keep zombie borrowers in the game. A G7 world with low yields and ageing populations is looking at a prolonged period of financial and social adjustment unless there is clarity on how to escape without a massive burst of inflation. Aside from the usual demographic arguments, it is for this reason that our long-term view is heavily skewed towards Emerging Markets, where debt levels are low, markets are being freed from government intervention and where investment flows can find yields much higher than in developed nations. Simply because potential growth rates are higher. So from a tactical perspective, we continue to see a need for diversification and the avoidance of market-sensitive risk through either low beta equity exposure or short-duration bets in fixed income. We prefer that exposure to Emerging Markets continue to be expressed through USD or low-beta means.
In theory, there are four ways to reduce debt load: grow “ out of debt, save and pay back (“deleveraging”), write off and restructure the debt, or inflate it away ” GLOBAL AUSTERITY MEASURES TAKING A TOLL
Belt-tightening is impeding growth – a bad sign says FOREX. com Research Director Kathleen Brooks. Whichever way you look at it the world is still full of debt. Households, banks and governments are all going through a process of deleveraging at the same time. This is likely to keep demand low and when you get deleveraging of this scale it typically means lower asset prices. The second half of the year is full of unanswered questions. Will European politicians work towards a banking union? Will elections in the Netherlands hurt market sentiment? The US fiscal cliff could potentially shift the focus from the Euro zone across the Atlantic with consequences for global financial markets. Not too long ago, it seemed as though the economic recovery was picking up steam. However progress was halted by a resurgence of tensions in Europe and government-driven austerity programmes impacting growth. With many countries attempting to reduce high
debt ratios, the process of deleveraging has led to reductions in government spending which is also a key component of GDP growth. Rather than seeing money put to work in the economy, the increased uncertainty is prompting a flight to safety as investors flock into havens. We expect uncertainty to remain high and growth to remain subdued as the EU continues to deal with the ongoing debt crisis and as political uncertainty persists. Economic activity is likely to slow further in China and the Euro zone may dip into recessizon as restrictive fiscal policies continue to impede growth. The risk is to the upside if central banks fire up their printing presses and provide more stimulus to support growth.
10 ISSUE SEVENTEEN-AUGUST/SEPTEMBER 2012
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