Pessimism could create opportunities in the second half of 2012 – ASHBURTON

James Qualtrough | June 12, 2012 | 0 Comments

Tristan Hanson, Head of Asset Allocation at Ashburton, comments on recent macro events and gives his views on what opportunities the market holds as the second half of the year starts to unfold:

“Near-term events are set to dominate news flow and market sentiment over the coming weeks, including French parliamentary elections, a second Greek election, a G20 meeting, a Fed meeting and the EU leaders’ summit at the end of the month. Markets started the week strongly, boosted by positive weekend news from (i) Spain’s request for up to €100bn to recapitalise its banks and (ii) Chinese macro data which showed signs of stabilisation after April’s weakness.
“Spain will receive up to €100bn from the EFSF or ESM bailout funds, with the actual number being determined following the completion of reports by private consultants later in the month. However, there is no free lunch: the money provided will increase the Spanish government’s debt load (by up to c.10% of GDP) and there is uncertainty whether this debt will subordinate existing bond holders. A bailout would also reduce the remaining funds for any other future bailouts that may be required. Nevertheless, the news may provide some temporary relief from Spanish concerns.

“Chinese economic data for May showed stronger than expected growth in bank lending and broad money supply, which will be viewed positively. Trade data positively surprised (both exports and imports), while real retail sales, fixed asset investment and industrial production stabilised at growth rates similar to April levels.

“Encouragingly, consumer price inflation dropped to 3.0% from 3.4% in April, which is helpful in creating room for further easing. The Chinese economy has slowed down appreciably in recent months, but any signs that growth rates are stabilising, albeit at lower levels, will provide relief to investors.

“While market direction will likely be determined by how these major macro uncertainties evolve, our central case sees US growth continuing, in the region of 2%-2.5% (perhaps with modest downside risk), and acceleration in the Chinese economy in H2 in response to policy easing. We expect the situation in Europe to remain fraught but, ultimately, even if Greece does exit the Euro we would expect a considerable policy response from the authorities. There remains significant political commitment to the Euro project in the corridors of power.

“Generally, we view equities as attractively priced and also retain a preference for corporate and emerging market bonds within fixed income markets. We also think a number of emerging market currencies should strengthen against the majors (including interest rate return). We continue to be positioned somewhat cautiously, but, in our view, the growing sense of pessimism has created some attractive valuation opportunities for medium-term investors in a number of markets.”