The outcome of the Greek election in mid-June was viewed as a positive step in keeping the euro intact – at least in the short-term. However, at the time little market relief was seen fol-lowing the election of a pro-bail-out party as fundamental issues with Italy and Spain remained. So where do we go from here?
Global growth
Following the Greek election, J.P. Morgan Asset Management believed there was cause for greater opti-mism the European crisis could be managed. “Greece undoubtedly faces some difficult years, but we think its troubles will become more contained.” However, in late June Richard Jeffrey, CIO at Cazenove Capital Management, asserted the positive Greek election was a ‘stay of execution’ for Europe, noting the crisis had been 10 years in the making and therefore unlikely to be resolved quickly.
Dan Morris, global strategist at J.P. Morgan, said he expected 2012 to end with a moderately positive return for equity markets. Certain regions con-tinue to offer decent prospects for earnings growth, even if GDP growth is weak, Morris noted.
Willem Sels, UK head of invest-ment strategy at HSBC Private Bank noted the run of economic data up to mid-June revealed the Eurozone crisis was having “a very real nega-tive impact on global growth.” He noted further economic numbers may continue to disappoint and with global growth at such anaemic levels, he believed the chances of more regions in the world sliding into recession were increasing.
In assessing the positive market reaction following the Euro Summit at the end of June, Trevor Greetham, director of asset allocation at Fidelity Worldwide Investment said there was a sense the euro hanging together could help turn the global economic cycle up again. “However, it’s too early to call a bottom – and we have seen a lot of feverish rallies reverse in recent years, he said. “Global growth is slowing and we’re still likely to see soft economic data for a while. More likely than not the markets will have time to doubt the efficacy of policy before it fully takes effect.”
Europe
In general, investment groups con-tinue to look more favourably on Northern Europe, especially Ger-many. Despite the country’s relative outperformance in the first half of 2012, by late June valuations relative to other countries in the eurozone were still below average, as German corporate earnings kept rising even as regional uncertainty pushed prices down, Morris noted. “With respect to peripheral markets such as Spain and Italy, we believe it is still too early to go in. We do not expect to see any significant rebound in stock markets until there is greater certainty on the funding situation for these countries.”
Cazenove’s Jeffrey was less posi-tive on points of Northern Europe. He said the real risk in Europe remains contagion and the economy he fears for most is France as it is deeply exposed to debt in Southern Europe. Fidelity’s Greetham added the fun-damental link between austerity, economic weakness and asset price declines in the periphery remains in place. Euro area risks will remain centred on political opposition to aus-terity (Greece, Spain, Italy) and bail-outs (Germany, Holland, Finland), he said. “Greece may fail to meet targets and there are those that would like to see a painful exit to discourage others from taking that route or failing on their own reform pledges.”
Nia ll Ga llagher, f und man-ager of the GAM Star Continental European Equity fund, expects the tale of the ‘two Europes’ will con-tinue but investors should be wary of dismissing European equities as a whole. Europe’s economies are not uniformly poor and the asset class is undeniably cheap, he noted. “Many northern and cen-tral European economies are rela-tively healthy, with strong exports, low unemployment, high domestic savings and near-balanced fiscal accounts,” Gallagher said. “We do not believe the northern and central European economies are immune from global conditions but their prospects do vary greatly from those of peripheral Europe.”
Morgan Stanley strategists also believed European equity mar-kets to be cheap but they remained cautious in the short-term due to the lack of a credible solution for Europe’s macro problems. “Despite a good first quarter results season our lead indicators still point to negative EPS growth ahead and earnings revisions appear to be rolling over. With MSCI Europe’s 12-month P/E down to 10 there is scope for a rebound if geopolitical concerns in Europe abate.”
Emerging markets
According to J.P. Morgan’s Morris, emerging markets have suffered this year as a result of widespread risk aversion and weaker-than-expected economic growth, not only in China but also in Brazil and India. However, Morris noted, potential returns for emerging markets appear reasonably good over the remainder of the year, although much depends on policy response in the regions. “We expect Chinese growth to rebound over the course of the year, benefiting global equities and commodity exporters, but the policy outlook is less clear for Brazil and India.”
Charles Schwab agreed emerging markets still offer value. The group noted: “The ongoing (EU) crisis is affecting economies around the world and we remain cautious in the near term but believe emerging markets are still positive longer-term investments.”
US
During the summer and looking ahead to the remainder of the year, J.P. Morgan had expectations the US would outperform other devel-oped markets in the belief its fiscal and monetary policy was, broadly speaking, more stimulative.
Ana lysts at Charles Schwab noted willingness to take action isn’t a problem for the Fed, but they remained skeptical about the impact of any new round of quan-titative easing, other than per-haps psychologica l. “A lt hough the US economy appears to be holding its own, a renewed sus-tainable uptrend may be hard to come by until some substantive policy actions are taken around the globe.” With every new ‘fix’ by authorities, the positive market bump appears to be get shorter, the group noted. “While we believe the US economy will continue to muddle along, we are in the midst of the third consecutive mid-year slowdown in economic growth and it may be hard to get a reaccelera-tion until we have some answers to the longer-term issues.”
Within the US equity market Psigma American fund manager James Abate stated the case for US large caps, noting smaller compa-nies were looking expensive. “Val-uation is always a critical element of successful investing and the facts suggest that the largest US companies are the cheapest now.”
Bonds
As summer progressed and with the Greek election over, fixed interest concern turned to other markets. Nick Gartside, international CIO for fixed income at J.P. Morgan Asset Management said Spain, a much larger market than Greece, had become a far more significant source of concern.
While UK gilts have been a safe haven asset amid the Eurozone con-cerns, M&G’s Jim Leaviss noted in June the UK’s AAA credit rating was looking increasingly vulner-able. “Failing to both get govern-ment spending down and to grow the economy means that the (UK’s) debt/GDP ratio will continue to grow and it becomes increasingly likely the UK will lose its prized AAA ratings.” However, he ques-tioned whether or not it would dis-suade investors from still looking to gilts, believing no matter what happens in the UK, a gilt sell-off is unlikely. Already, he noted: “our sovereign CDS spreads are lower than AAA Germany’s and our bond yields are as low as they’ve ever been. While the Eurozone crisis continues the UK remains a safe haven for capital.” He added: “A downgrade might therefore just be an embarrassment for the Chan-cellor, rather than the starting gun for a race out of UK bond markets.”
As for US Treasuries, Kevin Gar-diner, head of investment strategy EMEA at Barclays, pointed out the late June decision by the US to extend its Maturity Extension Programme (Operation Twist) for another six months would likely keep a lid on long term bond yields.
With continued expectations of unattractive and low yields among government debt, many strategists and managers believe bond inves-tors should be looking to corpo-rate credit. Gartside noted: “The highest conviction opportunities we are identifying at the moment are in credit, particularly invest-ment grade credit. Corporate fun-damentals are strong, and investors are being well compensated for risk by very attractive yield spreads.” While financials have been a source of worry for investors, Gardiner said bank downgrades were looking largely priced in.
Property
Peter Hobbs, IPD’s senior director, said: “The picture for global real estate is a tale of havens and have-nots. Institutions want safety, and at the minute, that means low-yielding prime office or retail in safe haven pockets around the world. As a result, there’s a real pola risat ion grow ing bet ween the likes of Dublin and Madrid against London and New York, due to concerns over debt or occu-pier demand.” Hobbs noted South African property prices have been on the rise of late but that may slow as investors look for safe havens.
“Properties with good leases held by strong tenants will always be attractive to institutions sheltering from the volatility of global mar-kets. These properties tend to be situated near strong transport links – so it’s no surprise that hubs such as London, New York and Seoul have held up despite the gloom.”
