Swamped by a mass of Powerpoint presentations revealing facts and figures on markets past and present, what everyone really wants to know is – what will happen next?
An optimistic mood
So far the story being told to investors is that many of the opportunities are dependent upon a resolution being found to the eurozone solvency crisis, a pick-up in the pace of the US economic recovery and a gradual slowdown in China.
Outside the conference room, markets have started the year in a fairly optimistic mood. Everything points to growth in the US economy and a soft landing in China, where inflationary pressures seem to have moderated.
The risk of a solvency crisis in the eurozone has somewhat abated for now with the provision of cheap money to banks by European Central Bank. This long-term refinancing operation (LTRO), a form of quantitative easing, has already impacted eurozone government bonds and consequently yields are falling. The general consensus from speakers at the conferences is that this has been a smart move by the ECB to improve the balance sheets of eurozone banks and create new buyers of government debt. Even the downgrades announced by Standard & Poor’s and the breakdown of talks on restructuring Greek debt have failed to dampen the general optimism.
The New Year conference circuit always tends to be a fairly optimistic affair. For me though, this kind of optimism is reminiscent of what I have been hearing in previous years.
Our view is that the hurdles facing the global economy are not to be underestimated and to us many asset prices already appear fully valued. The challenge for the eurozone is how to tackle as one the issues surrounding unity, austerity and growth. It seems that fiscal unity can only be achieved by further austerity measures which come at the cost of economic growth. If this is the case then another recession seems inevitable.
Genuine opportunities
The hope for the global economy is that this can be offset by stronger growth in US and emerging markets. If not, despite the return, this may lead to a further flight to the safety that Treasuries, bunds and gilts are seen to offer.
We entered 2012 in a fairly cautious fashion – although there are pockets of genuine value among the asset classes we monitor. We have endeavoured to position ourselves to benefit from a re-rating in these assets, such as equities in parts of the Asia Pacific region including Japan.
Elsewhere our equity exposure remains largely defensive, where balance sheets are strong and companies have notable exposure to the world’s growing economies. We have shared the industry pain in a lack of exposure to gilts in favour of investment grade, high yield and the emerging market debt markets.
In addition, we have continued to build our diversification through non-traditional asset classes. Uncorrelated strategies offer us the much needed diversification and we recently initiated a position in reinsurance which is currently benefitting from a significant increase in premiums following last year’s spate of natural disasters.
We are not fully invested and cash and near-cash weightings remain high as we believe there will be further opportunities to take advantage of market volatility.
