FYI | Jul 12 2012
– Global economic issues impacting on risk asset returns
– A more coordinated policy response is needed
– Value picture for investment markets remains mixed
– Standard Life, St George Bank offer some market views
By Chris Shaw
Global investment manager Standard Life Investments suggests while issues in Europe, China and energy markets have contributed to a slowdown in global growth, there remain positive signs of recovery in other parts of the global economy. These positive signs could be supported by more coordinated policy action in the group's view.
As Standard Life head of global strategy, Andrew Milligan, points out, in recent months the return environment for risk assets has worsened and volatility has reappeared in markets. The main factor driving this is the lack of any resolution to the sovereign debt and banking crises in Europe.
Lower growth in China has also been a factor, while Milligan notes energy prices have both hindered and helped growth, the former when oil prices were as high as US$125 per barrel [Brent] and the latter as prices have since fallen back to the US$90-$100 per barrel level.
One piece of good news in Milligan's view is that the issues are forcing European authorities to reconsider austerity measures and again focus more on growth needs. At the same time there have been some positives from the US, where the housing market appears to be recovering, consumer spending power appears solidly underpinned and much of the manufacturing sector is in solid shape.
Japan is also offering some positive signs with respect to growth, Milligan suggesting the Japanese economy could deliver GDP growth of as much as 3% this year.
On balance, Milligan continues to suggest a release from the current environment of contained returns requires more of a policy response covering not only monetary policy but fiscal and regulatory measures as well.
St George Bank suggests that while European leaders are taking steps in the right direction, the pace of any change remains slow. This has allowed contagion concerns to remain at the forefront for investors, so limiting confidence on the outlook for any recovery shorter-term.
As a result St George Bank suggests economic growth in the eurozone will deteriorate further this year and remain lacklustre for some time after that. The bank expects any slowdown in demand in Europe to impact on the Australian economy.
This is especially the case as the Australian dollar has remained relatively high in recent months, something St George Bank expects will hurt dollar sensitive sectors of the domestic economy such as manufacturing, tourism and retail.
One positive in St George Bank's view is while the domestic economy is likely to come under further pressure if the eurozone situation continues to worsen, the Reserve Bank of Australia (RBA) has room to cut rates significantly to help limit the impact on Australia.
Given the current environment, Standard Life suggests the value picture for markets is mixed at present. Bonds are expensive relative to most scenarios for medium-term growth and inflation, while equity markets continue to look for a major policy response.
While the higher growth expectations for emerging market economies have attracted much interest from investors in recent years, Standard Life is neutral on emerging market equities at present. This reflects the view while valuations in general are attractive, a positive trigger is needed to drive these markets higher.
For the US market Standard Life suggests with interest rates still at low levels, equity dividends are attractive on a yield basis relative to both government bonds and cash. In the UK the group notes there are signs investors are starting to differentiate between the relative strengths and weaknesses of individual businesses, meaning stocks with better prospects are being rewarded. This means no change to the group's approach of building stakes in high quality companies where growth potential is not yet fully priced in. A similar strategy is being applied in European markets.
With respect to currency markets, Standard Life suggests the Australian dollar in particular appears to be priced well above perfection at present. Given inflationary expectations are falling, employment is softening and Chinese growth estimates are slipping, the group sees the Australian dollar at risk of falling further.
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