Is the crisis really over?

From time to time, Morningstar publishes third party content under our "Perspectives" heading. If you are interested in Morningstar featuring your content, please contact Online Editor Holly Cook (holly.cook@morningstar.com). Here, Stefan Angele, Head of Investment Management at Swiss & Global Asset Management, the exclusive manager of Julius Baer Funds, explains his outlook for the main asset groups.

Despite the slight correction on the stock markets at the end of October, our overall picture for high-risk securities remains positive. The steady improvement in the macro-economic data, good corporate results once again and the still low level of interest rates continue to offer grounds for confidence in our opinion. The trend seen thus far on the international capital markets--pointing towards a stabilisation of the economy and positive growth rates for 2010--therefore remains intact. Even after the strong share price gains posted on the stock markets since March, we still see further upside potential. We assume that the momentum on the international capital markets will persist to the end of the year, and have therefore used the correction to make additional investments in equities. This has resulted in a further slight increase in our existing overweighting.

Environment favourable for high-risk securities
The economic data remain promising, with the leading indicators in Asia in particular--Japan excepted--implying a dynamic economic recovery. The trend of a cyclical recovery is also continuing in the US. For example, the most recent numbers for the US purchasing managers index for the manufacturing industry came in slightly higher than expected at 56 points. The macro-economic indicators we track have therefore thus far shown no sign of a weakening or a turnaround in the prevailing positive growth trend.

Inflation not playing a role for the time being
The doggedly low level of interest rates is also pleasing. Although Australia and Norway have raised their key rates, the other central banks are not expected to follow suit soon given that the lagging economic indicators such as the job market have still to return to growth territory. Correspondingly, the trend of falling yields has set in again on Europe’s bond markets. Inflation is not an issue for the time being, which will also lend support to high-risk investments going forward.

The previous corrections on the stock market in June and October show that investor scepticism with regard to the economic recovery remains high. The respective increase in implied volatility on the US market (VIX) indicates that even smaller share price corrections are prompting market participants to immediately seek to hedge risk with options. We regard such hedging strategies as being premature in the current environment, and rate the negative sentiment as a further positive factor. As long as market participants keep tending to distrust the current recovery and cash holdings remain relatively high, the market environment will stay favourable for equities.

Corporate bonds--high number of new issues
We have maintained our overweight allocation in corporate bonds. The central banks’ desire to keep interest rates low as long as possible offers good potential returns for high-risk bonds. As the year draws to a close, new issue activity is picking up, credit spreads have fallen back, and the premiums on new bonds versus the secondary market are smaller. More high-risk bonds are entering the market with an increasing number of issuers with lower credit ratings, or no rating at all, issuing debt. These positive developments should however be met with caution, selective investing is still important.

Equities--European and Asian emerging markets show promise
Recent company results exceeded our expectations. Around 40% of the companies in the Bloomberg world equity index were able to post positive sales growth quarter-on-quarter, while the numbers of companies with positive and negative earnings growth balanced each other out. The general uptrend continued worldwide, in particular in certain emerging markets such as Russia and Brazil, and also in the case of locally traded Chinese stocks.

We expect the momentum in international capital markets to persist until the end of the year, and have used the correction to make additional investments in equities, with a focus on European and Asian emerging markets.

Commodities--returning to positive territory
After a brief consolidation phase, the commodities markets are returning to positive territory and we expect the rally to continue to the end of the year. Precious metals are leading the uptrend. Gold is being supported by a wide range of surprising factors. One such example is that the famous department store Harrods recently started selling its customers physical gold, while the Bank of Mauritius has bought two tonnes of gold from the International Monetary Fund. In this positive environment, we are favouring cyclical commodities such as oil and copper.

Currencies--neutral weighting for US dollar
Following its decline, the US dollar rallied in November, although this could be a temporary phenomenon following mixed messages from the Federal Reserve. On the one hand, the Federal Reserve is highlighting the importance of a strong US dollar over the long term to finance the budget deficit. On the other hand, a weaker US dollar is very much in the US’s interests at present not just because of the problem of excessive indebtedness, but also for tackling deflationary tendencies. We therefore continue to maintain a neutral position for the currency.

Australia and Norway are the only countries that have already increased their key rates. Despite the sharp rises in exchange rates, we are sticking to our positive assessment of the Australian dollar and Norwegian krone on the basis of the interest-rate advantage and higher growth momentum. Positive comments from the Bank of England, coupled with the announcement that the asset purchase scheme would only be expanded slightly, gave a fillip to the British pound. We expect a further rise from a still undervalued level.

Hedge funds--potential in relative value approaches
Improved fundamentals have prompted us to give hedge funds a neutral weighting and we expect neutral and arbitrage strategies to gain importance, offering potential in relative value approaches. Given there are still sufficient opportunities on offer for trading-orientated fund managers, we are neutral on liquid strategies such as equity hedge and global macro trading. We are underweight event driven equity.

Disclaimer: All views expressed in this third party article are those of the author(s) alone and not necessarily those of Morningstar. Morningstar is not responsible for the comments nor will it be liable in any way for any information provided by the author.