United Kingdom >>
Markets & views
The Informer - Autumn edition 2010
Welcome to the Autumn 2010 edition of The Informer.
A few short months ago – back beyond the brief British summer – the last edition of The Informer pondered the shape of things to come. Would the path of the global economy over the cycle be best represented as a U, a V, or a W...or even as an uninspiring L? The jury is still out, of course, but the possibility of a sharp V-shaped growth rebound now seems even more remote. Relatively weak growth implies weak tax revenue, and given the alarm generated by the Greek bail-out, many – but not all – governments are now on the lookout for early spending cuts.
Our autumn economics article looks at the arguments for and against fiscal retrenchment at this point of the cycle. In this context, equities have struggled, despite robust corporate earnings, and strong investor demand for mainstream government bonds has outweighed any fiscal concerns and sent yields sharply lower. Nevertheless, the crisis in Greece has sparked awareness of the risks inherent in developed nation sovereign debt and has further encouraged investors to seek out alternative ‘safe haven’ assets including emerging market debt.
July saw us celebrate the ten-year anniversary of our own emerging market debt capability. In this edition of The Informer, fund manager Kieran Curtis discusses what the EMD asset class offers investors – the prospect of useful returns, diversification and a stake in the future growth of a group of nations already representing around one third of global GDP. As ever, we hope that amongst the mix of articles you will find something new, thought-provoking or helpful!
Food for thought; has Emerging Market debt graduated to the strategic allocation universe?
A common theme in our recent conversations with investors has been de-risking. The de-risking of portfolios takes its roots in a simple two-fold realisation. Firstly, the “safe haven” asset label has had to be redefined following the unfolding of the Greek crisis. Secondly, while fundamentals have deteriorated in core fixed income asset markets, the opposite has occurred in emerging markets where fundamentals appear healthier. The key debt-to-GDP ratio, while flirting with 100% in developed countries with potential for further deterioration, has, in emerging markets, stayed at a sound 40% average with the prospect of further improvement.
Real Estate - A varied and unique investment.
Investing in commercial real estate is not like investing in other asset classes; the dynamics of the market are very different. Unlike other assets such as equities or gilts, real estate is not a homogeneous investment as differences in location, structure, tenants and lease structures mean that no two properties can ever be identical. It is also an investment where there is the potential to add value via active management through initiatives such as renegotiating leases or extending or refurbishing a property – something that cannot be done with equities or gilts. It is also one where income tends to be relatively stable, a reflection of upward-only, index-linked or fixed uplift rental contracts. Over the long term, returns from commercial real estate display fairly low correlations with returns from either equities or gilts and, as a result, can provide valuable diversification benefits to a mixed asset portfolio.
Economic Watch - To cut or not to cut? That is the policy question....
The second quarter of this year was as bad for investors in higher risk asset classes, as the first quarter was good. The most important catalyst for the sharp change in sentiment was the ‘Greek crisis’ in Europe, but against this chaotic euro-area backdrop there was also a gradual deterioration in forward-looking indicators of the nascent global economic recovery. In short, investors are concerned that the global economy may be heading for a dreaded “double-dip” recession. This explains why the world’s headline equity indices fell by between 10% to 15% over the quarter, and why so-called “safe haven” asset classes have risen in value.