Opalesque Industry Updates - Union Bancaire Privée's outlook for 2010|
After the ice age comes the thaw. The climate at the end of 2009 is confirming that the economic recovery is under way, albeit at contrasting speeds in the G7 and the emerging economies: Asia should be sizzling while the Western growth model is set to remain distinctly lukewarm. Overall, financial markets are getting back on their feet and investment opportunities abound. Emerging markets’ equities still seem preferable to bonds but blue chips and defensive names are increasingly appealing. Whilst a depression has been averted, some other extreme risks are being generated by the drastic reflation policies.
World growth is centered in Asia and emerging countries
Patrice Gautry, UBP’s Chief Economist, clearly states that Asia and emerging countries will continue to drive the world economy in 2010. Beyond a growth rebound, what we are seeing is a lasting shift in the world economy’s centre of gravity towards those countries, whose growth is firm and well-grounded. As for the Western model (the G7), overshadowed by debt and unemployment which are weighing down on consumption, it is clearly treading water and those countries’ growth potential has been badly damaged.
Moreover, the fresh generation of growth drivers, such as new technologies, is struggling to emerge.
Against this backdrop, disinflation still prevails everywhere, even though inflation may flare up here and there. Budget deficits will stay substantial in 2010, especially in developed countries.
“Rising debt is structural in the G7 whereas in emerging countries brisk growth will help reduce it fast”, says Mr Gautry.
The G7’s central banks will have to maintain their accommodating monetary policies whilst remaining careful to avoid any bubbles forming on some assets through too much easing. To sum up, moderate growth should follow from the 2009 recession, but many global imbalances will linger.
Investment strategy: keep risky assets rotating
UBP’s investment strategy is based on the current main economic trends and reflects budgetary and monetary policies. Christophe Bernard, the Chief Investment Officer in charge of strategy, recommends an overweighting of risky assets as long as monetary policies remain accommodating and as corporate earnings keep exceeding analysts’ expectations. He also favours a strategic overweighting of emerging countries in equity portfolios but with a rotation between markets.
However, as the effects of the stimulus measures fade, he advocates an opportunistic positioning on blue-chip and defensive equities, which offer an attractive alternative to corporate bonds. Christophe Bernard also provides an insightful analysis of tail risks (the risk of extreme events) that are threatening financial markets and economies, pointing out that the potential for a loss of confidence in governments and fiat money is strengthening the appeal of gold and should prompt asset managers to hedge their diversified portfolios.
The alternative asset management industry, as it rises from its ashes, is becoming proactive again and generating positive performances. Christophe Bernard believes we should “expect hedge funds to outperform bonds and potentially equities as the environment turns favourable to alpha generation and as available credit and equity risk-premiums shrink.” He therefore advises aiming for liquid, and especially long/short and credit strategies. Furthermore, event-driven strategies should bounce back sharply in 2010, under the impetus of a wave of mergers and acquisitions.