Mon, 07/12/2009 - 10:07
Horacio Valeiras, Managing Director, Nicholas-Applegate Capital Management and CIO, Allianz Global Investors Management Partners, looks back at 2009 and outlines his views on 2010.
History will remember the first decade of 21st Century as when we saw the first signs of a shift in economic power, with the last year showing it most significantly, from West to East.
With regard to investment classes, we experienced a negative 10 year cycle for returns in equities with the S&P 500, Dow Jones and EuroStoxx 20 being down significantly
The story of 2009 has been the massive and unprecedented amounts of liquidity that governments have pumped into the market. In March 2009 shares hit their lowest level; however, the liquidity supplied by government has acted as a floor to credit and given investors confidence to move from non-risky to riskier assets.
The government response in the developed world has been successful in the short term in stemming the panic that emerged post the credit crunch; however, in the long term these policies could prevent the global imbalances which led to these problems, from being corrected.
In 2009 we have seen the clearest indication of an economic power shift to Asia: Government deficits are highest in developed countries and the largest creditors of these deficits are countries in Asia.
The dollar has weakened further in 2009 and although Obama's response has been as successful as any other toward putting a floor under the dollar it is hard to be excited for the future of the US economy.
It is clear that the global economy has recovered, aided by the flood of liquidity and flow of credit pumped in to the system by governments and central banks. The quality of recovery is less clear with growth in US and Europe due predominately to government actions, although the recovery in Asia appears to be more fundamental.
Equities ended up at the upper end of our expectations from last year. Mainly as a result of liquidity pumped into the market and less from improving fundamentals.
High yield corporate debt has been the best-performing asset class in 2009; Japanese equities the worst.
The continuing impact of the financial crisis and outlook for 2010
Inflation rates in the US and UK in 2010 are likely to rise to 5% to 10% unless governments make the correct decisions in removing liquidity from the system at the right times. Australia has started increasing interest rates and I expect the Fed to follow suit, maybe already in the second quarter. The initial effect of this is likely to result in equities falling; however, it will be a positive measure in the long term in dealing with the threat of inflation.
Economic winners of the financial crisis are definitely Asia. Unlike other emerging markets they are in a particularly strong position due to the fact that they rely very little on debt and have had a robust policy response to the recession. Australia, Brazil and the Middle East are also in strong positions as commodities are likely to increase in value.
The UK will find revenue won't meet government projections. High taxes have already led to a significant outflow of people and this will continue in 2010.
We believe that we are still in a "precarious position" as too many major variables are uncertain, The last time we had such huge Governmental reform in the US federal system was during the Great Depression.
UK and U.S. will continue to suffer from the policy response to the crisis; however, this won't necessarily mean that equity markets will suffer given that there is usually no direct correlation between the two.
The amount of liquidity in the market will prevent the stock market from declining further than its current levels in 2010. The rate of liquidity withdrawal will be a key variable in determining equity market performance.
We will see earnings growth by Asian companies in 2010. However, in Europe and the US company profits will in the main be attributed to cost cutting.
Company earnings are unlikely to grow in the US or UK as their internal consumers still need to restructure their domestic balance sheet.
The prospect for higher U.S. tax rates in 2011, combined with potentially higher taxes on the top earners to fund healthcare costs, will be a negative for U.S. equities.
The new US healthcare system is likely to hurt UK companies more than French or German companies. This is because UK companies have a greater exposure to the US market.
Given our remaining overall bearish outlook for developed market equities active management will regain importance and active stock picking will be crucial in 2010.
China and other US creditors based in Asia are increasingly questioning the dollar and diversifying into other foreign currencies. This process will continue to accelerate in 2010.
Although no emerging market currency will emerge to challenge the dollar in 2010, we will see the dollar in 2010 continue to weaken.
Asset Management Industry
Quant strategies are likely to regain momentum as company fundamentals improve and we expect them to do well in the next year.
The IPO market will stay subdued as the backlog of companies ready to float remains small.
US institutional investors will ask their managers for creative solutions to meet actuarial return assumptions. We will see an increase in absolute return strategies to meet plan assumptions.
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