Most asset classes bar major government bonds have seen a
pullback in recent weeks amid renewed concerns over the European
economic and financial crisis, a slowdown in China and the weak
secular economic growth in the advanced economies. The MSCI AC
World Index (including both advanced and emerging equities) has
corrected by some 12.7% from its year-to-date high in local
currency terms, while ten-year treasuries, gilts and bunds have
fallen to 1.72%, 1.83% and 1.43% respectively (as at 18 May
Europe at the epicentre of global risks
The focus is on the risk of a Greek default and eurozone exit
and the lack of growth in the region. The political uncertainty in
Greece is increasing the risk of a run on its banks and raising
fears of contagion to other parts of Europe. Germany may eventually
have to provide the backstop to the peripheral economies' debt
problems. The other element of this crisis is the lack of growth in
The peripheral economies are in severe recessions and the core
economies, bar Germany, are seeing a sharp slowdown. While they are
very much inter-related, Europe's problems are not just about
austerity – they include deleveraging, uncompetitive
economies, the relative strength of the euro (despite having fallen
by 10% over the past year) and political uncertainties. Thus, the
region's prospects over the medium term will largely be
dictated by both politics and the need to implement supply side
US and emerging markets growth is key
The hope is that signs of a stabilisation in the US economic
recovery and comparatively decent growth in the emerging economies
hold to offset weaknesses in Europe. There are tentative signs of
an improvement in US housing activity, job creation remains
positive though slowing and retail sales continue to hold up.
Meanwhile, growth in the emerging economies is expected to be
5.7% in 2012 and 6% in 2013, according to the latest IMF forecasts.
As a result, global growth is expected to be 3.5% this year and
4.1% next year.
Navigating in an uncertain environment
A stabilisation in the US economic recovery and decent growth in
the emerging economies should provide support to corporate
earnings, while equities appear inexpensively valued on most
measures. However, structural risks abound, with high government
debts and uncompetitive economies in certain parts of Europe,
China's transition to a more domestically-orientated economy
and the US 'fiscal cliff' (though the stock market has not
been too concerned about this latter issue thus far). The key to
navigating the uncertain environment is a focus on companies with
robust business models and global franchises as well as having a
well-crafted, diversified portfolio.
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