Baring Asset Management has raised several of its ‘recovery scores’ for Western countries according to its latest global economic research.
The fund manager says that the industrial data over the past few weeks has been unequivocally strong in US, Northern Europe and Japan. While there are still a few weak patches, Barings believes these are the product of severe weather over the period, such as UK Q4 GDP figures and the latest US non-farm payrolls.
However, the fund manager warns there are threats on the horizon with more signs of inflation among the usual suspects like the UK and China, and it also expects higher inflation figures in the US, Latin America and Eastern Europe. Barings also warns of a growing chance of political risk in Europe but in recent weeks the world’s attention has been gripped by developments in Egypt.
Percival Stanion, Head of Asset Allocation at Barings says: “Although less important than Europe economically, Egypt is a key bell weather state in the Middle East and political developments there could bring instability to the main oil producing states. At the moment most of these have the resources to buy off discontent, but the oil price push through USD100 per barrel is a sign of the market’s nervousness.
“Meanwhile, the fear of contagion across Europe, spreading to Portugal, Spain and even Belgium has receded a little amid signs that Germany may be willing to back some improvements in the bailout fund, the EFSF [the European Financial Stability Fund].”
Closer to home, the fund manager notes that the economic news in the UK has been disappointing. Barings argues that the fourth quarter GDP figures are almost certainly considerably distorted by the weather, but they have come at a time when there is heightened concern over the impact of public sector job josses while the private sector recovery has yet to gather significant momentum.
Stanion says: “Inflation continues to disappoint, but given that the Bank of England faces an unappetising choice of outcomes, we believe that on balance they will probably decide to forgo any rate rise in the near future, or risk pushing thousands of mortgage holders into default. This would normally lead to a loss of confidence in Sterling.”
In emerging markets, Barings says that there are increasing signs that governments are taking firmer action against the inflationary threat.
Stanion adds: “China has now moved away from an overtly easy policy and has raised rates and tightened bank reserve requirements over recent weeks. There is likely to be more tightening in the pipeline which, while dampening activity in the short term, does make the long term secular argument sounder. India, Thailand and South Korea are also moving to tighten policy.”
In terms of asset prices Barings believes that many markets had become somewhat overbought in the sharp rallies up to the year end. Subsequently the fund manager has seen some profit taking and a degree of rotation between sectors and markets. Peripheral European markets like Spain have bounced sharply and small caps have surged, while mining stocks have given ground.
One significant casualty has been gold bullion; last year’s best asset in sterling terms has dropped sharply this past month, partly as a result of sterling strength, but also due to profit taking in the metal itself, despite the turbulence in the Middle East. Strategically, the fund manager still prefers equities, though profit margins may be approaching a peak due to higher input costs.
Stanion concludes: We are looking to add to equities and commercial property and will continue to use assets like corporate bonds as a source of funds.”
