SIG is increasing its weighting to equities against a background of almost universal investor pessimism, according to the firm’s latest monthly asset allocation report. In his monthly note, SIG CIO James Millard says, “investors remain very overweight cash” but “we are considerably more optimistic on the outlook for markets than consensus”…
Tensions in the global economy eased somewhat during December with the US growing above trend rate in the final quarter of 2011. In Europe, where many of the issues of 2011 remain unresolved, while the peripheral Euro countries will almost certainly stay in recession throughout 2012, the core countries may only ‘flirt’ with it. We do not believe that the down-grade in status by the ratings agencies will impact on progress in the Eurozone.
As far as the UK is concerned, while the country remains close to recession and may fall into negative growth in one quarter, the likelihood of that happening over two quarters (which defines a ‘recession’) is unlikely.
China’s recent data is also encouraging and points to the rise in business confidence and discounts the view that the housing market will lead to wider economic issues. Some of the weakness has been brought about by policy makers with measures that will be unwound later this year.
The Japanese economy slowed after showing strong growth in the summer. Much was down to exports slowing, particularly to Thailand where the floods had a major impact on economy. SIG believes exports will increase as this factor unwinds during the early part of 2012.
European issues remain the greatest challenge to improved market valuations during 2012. However, there are some important developments which have improved the situation. For example, I believe there will be no “banking accidents” in Europe in 2012 (such as Lehmans; Northern Rock and Bear Stearns) because of the half a trillion Euro borrowings made to European banks from the European Central Bank (ECB).
Also, tthe new governments in Italy and Spain, are continuing to reform their economies. Should they stay on track in 2012, then that again should help the wider European situation.
Also, the Spanish government bond rally at the end of 2011 was achieved without ECB or European Financial Stability Facility support.
Despite these positive signs though, significant challenges remain. Several European governments, including France, have lost their AAA rating, and while confidence improved in December, it can just as easily disappear if the promised reforms fail to materialise. And finally, Greece remains unstable politically and economically and could still undermine confidence across the region as a whole.
Yet despite the general pessimism – particularly concerning Europe – investors remain very overweight cash…. We are considerably more optimistic on the outlook for markets than the consensus. In addition, consensus remains very bearish on the Eurozone, while we have a neutral exposure. We acknowledge that growth is likely to be very weak but think that is already reflected in valuations.