Tell me moreInvestment View 2011
2011 Outlook for Investment
Customers
It has been a stormy summer for financial markets amid the twin US and euro-zone debt crises, political intransigence and a darkening outlook for the global economy. And signs are that the chill winds will stay with us for some time as the need for debt repayment suppresses growth rates for the next few years. With the steady drip of poor data in the developed world giving rise to fears of recession, investors are looking for policy-makers to once again step in. But further quantitative easing (QE) in the US and the UK and back-tracking on interest rate rises in Europe by central bankers is no longer sufficient to override the need for positive rather than negative action by politicians. We look for measures such as aggressive QE in the US and Europe, explicit inflation targeting in the US and short-term fiscal stimulus in conjunction with credible medium-term fiscal consolidation plans. Attempts to boost demand outside of the troubled developed world would also be welcome, such as monetary and fiscal stimulus as well as material currency appreciation in China. In the absence of dramatic policy action, a recession is a high probability outcome – a factor which is not yet fully priced into equity markets, despite recent falls.
While a deteriorating macro-economic environment suggests a more cautious approach in the short term, with a likely re-testing of August’s lows, valuation is the driver of equity markets in the longer term, and this is historically attractive on a multiple-year investment horizon. Companies that will be favoured are those with robust dividend yields, competitive advantage, strong balance sheets and a focus on exporting to emerging markets or domestically-focused emerging-market companies. Meanwhile, quality government bonds should remain in demand and real yields negative. Emerging-market local bonds should be supported by strong fundamentals and a pause in monetary tightening amid slowing world growth, as well as a positive currency outlook. Elsewhere within fixed income, non-financial corporate bonds should benefit from strong balance sheets, a search for yield and above-average risk premiums. Low yields and a weaker dollar should enable gold to continue hitting new highs.
The information in this document is not intended as an offer or solicitation to buy or sell securities or any other investment or banking product, nor does it constitute a personal recommendation. The information is believed to be correct but cannot be guaranteed. Any opinion or forecast constitutes our judgement as at the date of issue and is subject to change without notice. Any RBSG company, or a connected company, its clients and officers may have a position or engage in transactions in any of the securities mentioned. The analysis contained in this document has been procured, and may have been acted upon, by RBSG and connected companies for their own purposes, and the results are being made available to you on this understanding. To the extent permitted by law and without being inconsistent with any applicable regulation, neither RBSG nor any connected company accepts responsibility for any direct or indirect or consequential loss suffered by you or any other person as a result of your acting, or deciding not to act, in reliance upon such analysis.