As a result, they are content to wait for further recognisable improvements before upgrading any allocation to risk assets.
“At the moment it feels like the markets are engaged in a malevolent version of musical chairs and that when the music stops yet another country will be found wanting,” Barings’ director of asset allocation Andrew Cole said. “Greece has been a serial loser for much of the past 18 months, later joined by Ireland and Portugal.”
Cole believes the tempo has been rising to a crescendo recently and as each week went by, another country found itself under fire with no means to defend itself – Italy followed Spain, then the US and most recently France.
“The markets looked at the latest initiatives out of Europe and the US and threw a tantrum. All the political initiatives are coming too late [and] none of them address the microeconomic barriers to growth or use the limited resources of government to offer any meaningful incentive to the private sector to step in,” said Cole.
He added that while all of the “policy levers have been pulled” – fiscal pumping, zero interest rates, and quantitative easing – collectively very little real growth had been achieved and fiscal retrenchment now “filled the horizon”.
As a result, Cole says he remains underweight in equities because of concerns over growth outlooks and corporate profitability. However he did not rule out a policy change mid-month.
“Given the lower trading volumes in August, we would like to see a more convincing bottom achieved and signs that the market has fully embraced a more pessimistic outlook before upgrading risk assets such as equities,” said Cole.
