Investment Outlook

Investment Outlook Summer 2013

22-07-2013

2013-07-22

A speech by Ben Bernanke of the Federal Reserve on May 22nd triggered off a volatile month for financial assets around the world. Investors were getting worried that the time of easy money would be sooner over than expected. Bonds in the USA experienced the worst first half of the year since 1994. And this took place while we had an environment of only modest economic growth and low inflation. But while the correction in the US equity market was mild, Emerging Markets, Japan and several currencies and commodities got hammered.

The Federal Reserve and other Central Banks will have to be very careful to manage their exit from easy monetary policy, so that rising interest rates will not be chocking off the moderate economic recovery around the globe. In view of its narrow mandate of anchoring price stability only the ECB is restrained from unlimited quantitative easing.

New leadership in China has shown to be more hawkish on credit growth. Higher lending rates will have a dampening effect on the economy and although consensus is still calling for 7.7% economic growth, the risk is clearly on the downside. Slower growth in China will have implications for countries in Asia, exporters in Europe and commodity prices.

Europe has gone into the summer with a lot of unresolved political and financial issues. It looks like we will experience more of the same, but even Germany will have to deal with higher interest rates, a slower growing China and a much weaker Japanese Yen. The important Federal elections in Germany on September 22nd are not a done deal yet, although Angela Merkel remains popular. Only after the elections will the EG train start moving again in the direction of further linkage of sovereign national states.

Overall, European growth will be minimal at best in the second half of 2013 and unemployment remains much too high.

The Japanese situation has improved dramatically under Prime Minister Shinzo Abe since late last year and the recent correction in the stock market provides an opportunity to get some exposure there. The market dropped 20% in two weeks after May 22nd and the Yen moved up, catching many investors by surprise. The long Nikkei/ short Yen trade was just too ”crowded”.

The odds are that the upcoming elections for the Upper House will help the LDP and Shinzo Abe to continue with their plans to eliminate deflation and strengthen the Japanese economy. The much weaker Yen has already be favourable for corporate competitiveness and profitability.

The United States is well on track to achieve moderate economic growth. Housing improved, unemployment is slowly trending down. Corporate profitability is good and the stock market reasonably priced at just under 14 times forward looking profits, although it is expensive when measured by average cyclically adjusted earnings over the last 10 years with a P/E of 22 times. Although it is difficult to see another leg upwards in the stock market with the expected headwind of rising interest rates, it is possible that the market makes it back to the previous highs. More likely is a sideways moving equity market for the rest of the summer and stock picking will be more important than in the last 4 years when the market more than doubled and pulled most stocks along to much higher levels. 

Brazil is showing disappointing growth as a result of too much meddling in the economy by the government. In addition the public is fed up with the omni present corruption. Brazil is on the edge of stagflation, so drastic action is required.

Mexico is on the eve of a game changing decision to open up the state oil monopoly, anchored in the constitution. Furthermore it is an attractive lower cost supplier than China to US industry. Unfortunately investment opportunities are scarce and far from cheap.

ASSET ALLOCATION

Commensurate with the corporate earnings outlook in the publication of their first half 2013 earnings we will reduce our underweight risk position. Developed markets will get priority. We are keeping our bond portfolio duration as short as possible. We stick to our present currency diversification.

11 July 2013                                                                                                                                                                                                                                           LAAKEN ASSET MANAGEMENT N.V. © 2013

683