The strong global equity markets performance experienced since August 2012 has continued into 2013, and we remain encouraged by the progress in our key investment themes and the solid moves forward within our favoured markets. Additions to our core funds and direct equity holdings have been made following collective recognition and reassurance from the markets regarding the ability of Central Bankers and additional policymakers to set the stage and create growth for the world economy within a two year time-frame.
October this year will be the fifth anniversary of the collapse of the global financial system. Central Bankers, Regulators and Politicians remain fixated on avoiding a repeat of 2008. The threat of inflation spiralling out of control, or even the onset of deflation, has policy makers torn. Do they maintain loose monetary policy or do they begin to tighten it? Since October 2008, the prices of all asset classes have been dominated by the implosion in the global shadow banking system. The Federal Reserve, Bank of England, European Central Bank and Bank of Japan have all sought to offset the deflationary impacts of a withdrawal of credit.
The global crisis has forced Central Bankers to devise many schemes to try and inject liquidity into the financial systems and get credit flowing again. Examples include Quantitative Easing (QE), QE 2, Operation Twist, Long Term Repurchase Operations & Funds for Lending, with the specific aims being to repair the balance sheets of the financial institutions in the Western world while also encouraging the movement of cash into the hands of Governments, consumers and young professionals from the savers and pensioners within the Western economies. All these actions have had huge and significant impacts on asset classes, initially leading to higher valuations to Fixed Income, Commodities and latterly Equities & Real Estate.
The exit debate from these various stimulus policies has now finally started principally in the United States. The financial markets have shown signs of increased sensitivity to these possible policy changes during June as investors have begun to wake up and confront some potentially worrying valuations within a number of asset classes previously seen as safe-havens. With this in mind, we re-iterate our long-held wariness on some of the valuations seen within the Developed Countries Fixed Income markets. We prefer Credit Markets to Government Markets, and will continue to specifically favour sustainable income yield generated by bond funds which consist of sources such as high-yielding corporate bonds, commercial real estate and equity income.
Thinking back to the beginning of 2013, investors were obsessed with fiscal policy and its dramatic impact on growth in developed markets. The year started with concerns regarding the US “fiscal cliff” and the on-going problems in Europe. Yet the fiscal cliff has subsequently received little attention and the perception starting to emerge from Europe is that the fiscal pressures are easing. The phrase “muddling through” is now the accepted methodology used to describe the issues. Europe appears more manageable, aided by the support from the European Central Bank. Instead, it is the concerns regarding the weakness in the Chinese economy which has attracted most of the headlines recently. There is no doubt that whilst in certain countries economic activity is seen as being at an inflection point, the consensus remains that in the majority of others there remains a great deal of work to do to reignite growth.
US Equity markets have remained the best performers amongst the developed markers, with stocks having been rewarded for the higher levels of economic growth visible due to the continuous boost from vigorous corporate earnings growth, the backdrop of an accommodative monetary policy and the belief that the US will avoid a re-run of the budgetary dilemmas which resulted in the fiscal-cliff worries seen at the start of the year.
Emerging Markets have performed poorly so far in 2013. This year’s performance has been characterised by the noticeable outflows of capital by western investors. Whether this is based on worries about Chinese growth slowing down, or a preference for investing in assets in their own countries, we believe such a move ignores all the long-term growth attractions of these markets, and masks the fact that for 10 of the previous 12 years Emerging Markets have outperformed the Developed Markets. We still remain attracted and committed to the central tenets of the fundamentals which appeal to us, centring on low debt levels, favourable demographics and rising consumption levels amongst domestic populations.
The recurrent debate surrounding the unique tensions and circumstances of Monetary Authorities policy actions around the world is characterised by uncertainty regarding how these actions will be finally unwound. We believe that such worries will dissipate during the second half of 2013 as investors fully begin to understand that as much as the authorities are focused on ensuring economic growth, they are equally focused on the continued strengthening of the balance sheets of many financial institutions. We may see more uncertainty and volatility in Q3 & Q4 within the financial markets than we saw in Q1 & Q2, especially during the remaining months of the summer, but we anticipate that the fundamental story of accommodative central banks, a pick-up in global economic activity levels and the persistent low levels of valuations for many equities will provide pleasing returns and add to the good returns already seen during the first half of 2013.