Global investment market commentary from Marino Valensise, Head of Asset Allocation and Chairman of the Strategic Policy Group at Baring Asset Management
In our view, the US economy has proven resilient of late, enjoying improvements in employment and a reasonable rate of economic growth. However, since late summer, we have seen a number of data releases signalling weaker global economic activity, particularly in Europe. And in the second half of September, market participants finally woke up to this weaker data with a sell-off in riskier assets.
By mid-October, the release of the September US Retail Sales number provoked an even sharper market rout. It was a truly violent market reaction for such a small disappointment: the figure came in at -0.3% instead of the -0.1% consensus expectation. The fear was that the economic weakness in Europe had spread to the US.
We stand firm in our positive view on the US economy. In terms of economic data, the US is an economic bright spot and we believe it will continue to be supported by lower unemployment, which should likely sustain the strength of the US consumer sector. An extra source of help should be provided by declining energy prices. The US GDP figure rose to 3.5% (annualised) in Q3 2014 and we believe that future economic data releases will remain strong.
In Europe, however, the plan to revive growth has not been powerful enough and the prolonged agony of many lending institutions leaves businesses starved for funding. In a world in which economic activity is slowing, European exporters are now suffering, and this is becoming apparent in Germany. If Germany suffers enough, the intellectual debate on quantitative easing might be resolved positively, as political support for more aggressive European Central Bank action will grow: quantitative easing, also through a weaker euro currency, may come to the rescue.
However, we feel with bond yields already at a low level, European quantitative easing may be less successful than in the US in fostering economic growth. And, in the short term, it may also require a worsening in German economic conditions for the necessary political consensus to be achieved. All this weighs on our view for both economic growth and corporate earnings on the continent.
In Japan, corporate earnings continue to do well. Within the government, a debate is taking place on when to introduce an additional VAT increase (the second time); we are convinced that this will need to be postponed, unless implemented together with tax reforms to ease the burden for the corporate sector. This will be a key decision for the evolution of Japanese economic growth for the next 6-12 months. We will have greater visibility in early December. A positive resolution will open the door for much better growth and corporate profitability.
In emerging markets, the picture is mixed, with more than a few countries facing structural challenges. The data in China continues to be murky. Economic conditions might be worse than feared. Certainly, a broad range of indicators, as well as the external environment, point in that direction.
From our perspective, in a world where global growth has somewhat slowed we see US inflation being kept low by a variety of factors such as the stronger US dollar and lower oil price. We believe that the US Federal Reserve will have no reason to rush into raising interest rates. "Lower for longer" will be the name of the game. This view determines our stance on asset allocation.
We remain neutral on equities, as our equity risk premium indicators do not signal that valuations are excessively high. Within equities, we continue to prefer the US and Japan, as we have indicated above. However, recognising that global growth may be marginally slower, we have upgraded our view of Telecoms, while downgrading the more cyclical Industrials and Materials to a more neutral stance.
Elsewhere, we have upgraded inflation-linked securities (US TIPS). We believe there are opportunities to be found among these securities, even in this low inflation environment where small rises in inflation can add to value.
Lastly, US high yield bonds are also approaching better value levels after the recent market movements and have therefore been upgraded to a more positive view.