The US continues to demonstrate that it is in recovery mode with healthy balance sheets, a favourable dollar rate for their exporters, decent stock market performances, improving employment figures and even some house starts from builders. This is of course an election year but Bernanke will keep largely out of that and still has further quantitative easing up his sleeve if the US economy does falter.
Attractive propositions
Emerging markets are up over 10% this year with inflation falling in China, monetary policy easing and valuations around the whole region looking more attractive with growth, while slowing, still the envy of the Western world. Infrastructure and consumer spend continues unabated.
If we believe in the China story, which we largely do, the huge expansion programme will support oil prices and move on to commodities. In general we still believe that we are in the middle of a commodity super-cycle and with the pick-up in growth we will see commodity prices remain high.
Frontier markets, despite all the geopolitical risks and investor health warnings, have posted decent returns this year so far.
Europe appears to have finally realised that having continual meetings designed purely to delay dealing with their issues will no longer wash and have finally knuckled down to business which the markets are currently rewarding.
Gold, despite falling back from an all-time high, remains supported by central banks, particularly emerging markets, as a hedge against over-exposure to the dollar and this looks likely to continue. Negative real rates of return on cash and scarcity value will in all likelihood continue to support the price.
There are risks but…
We do appreciate that it is not all good news. In terms of Western sovereign debt markets, particularly for UK investors, those offering UK and US yields are at an all-time low particularly with inflation taken into account. This means investors are paying to receive a negative real rate of return.
A big danger here is not just the rate of return but also the potential for a significant capital loss if yields back up. However, debt also has some positives in the mix and investors seeking yield and prepared to pay a risk premium are benefitting within the high yield and corporate bond space.
To conclude, while risk remains entrenched within all markets those investors willing to commit to the markets and show some bravery will be rewarded.
