Today the situation is mixed.
Albeit for different reasons, we are maintaining a cautious approach to Brazil and India. The former has experienced excessive credit growth and must deal with a mini subprime crisis (although there are no parallels to be drawn with the US), and [President of Brazil] Dilma Roussef’s reforms are proving slow to implement.
However, there is still considerable leeway in terms of monetary policy, which should make it possible to continue correcting the real, which remains overvalued.
In the case of India, an inability to pass reforms, persistent inflation and a difficult start to the monsoon season all call for a cautious short-term approach.
As regards China, the slowdown is obvious but appears to be under control. Property sales are picking up, a ‘cash-for-clunkers’ scheme has been set up in rural areas and a whole range of targeted measures have been taken in addition to the first rate cut in June. Recently-published economic data confi rms a steady improvement in growth, which should stabilise at around 8% this year and be only slightly lower in 2013.
This situation has made investors nervous – perhaps excessively so because amid this structural slowing of the Chinese economy, the government remains in control and because more than anywhere else in the world, China has considerable room for manoeuvre. In particular, and despite a period of political transition, the pace of reform appears to be picking up already, especially in the financial industry.
In the short term, it is hard to be satisfied with any portfolio no matter how the assets are allocated. It is by no means certain that emerging markets will outperform developed markets given the possibility of European financial distress spreading to the rest of the world; commodity prices have fallen but mining companies are still investing; the most defensive sectors appear highly valued but companies in the most cyclical sectors are seeing a fall in orders.
Long- term visibility remains good and suggests continued growth with a further improvement in emerging countries’ living standards. Now we just need to keep our allocations aligned with this medium-term view while managing shorter-term risks.
I cannot promise you a crisis-free summer but we will be ready to do whatever is necessary to protect our clients assets.
