Asset Allocator's Soapbox: FundQuest's Havard Tveit

FundQuest’s Havard Tveit pinpoints the best investment opportunities as the global outlook enters uncharted waters.

The Trekkies among you will recognise the immortal words frequently uttered by Spock during the USS Enterprise’s quest to seek out new life forms. In many respects, the same phrase could be used to describe the global economic outlook at the present time.

The central directional themes of developments in eurozone, global growth rates, currencies and quantitative easing combine for a range of potential scenarios that could either be wildly optimistic or absolutely cataclysmic depending on how you read them.

From a European point of view, while developments in the eurozone remain a central concern for markets, the issues are at least restricted to the smaller economies like Greece, Portugal and Ireland. The sounder financial profile of countries like Spain and Italy and the sense that eurozone authorities (including the ECB) will respond to the crisis by putting in place more mechanisms to provide liquidity and manage the situation, mean that on balance, a systematic financial crisis or the breakup of the monetary union will be avoided.

As for global growth, the cycle continues, albeit at a relatively slow pace in mature economies. Recent concerns about global growth (US and China in particular) are expected to diminish with confirmation that US GDP should show signs of growing close to 2.5 in 2011 and associated leading indicators, as well as employment data, stabilising or improving during the summer.

It is also likely to lead to a weaker euro in the medium term with euro/USD in a range of 1.25 – 1.35 with this being the norm in the second half of 2011. This is not solely based on eurozone concerns but also on relative valuations and the current pricing of future key interest rate rises.

This has been accelerated with the recent ECB interest rates increase at the beginning of July but these should now remain firm until the beginning of 2012.

The corresponding end of QE II in the US and a better understanding of the impacts will probably mean that no QE III will take place this year and it is therefore likely that the first US key rate hikes happen in the early months of 2012.

But what economies are likely to outperform from this point? Developed equities are still very attractive as monetary conditions remain extremely supportive in the US and the same is true in respect of the eurozone equities on a relative value basis.

In the UK, there is a slightly different story with a lower interest rate hike probability being supportive but the fear of any hike in 2011 would have a negative effect. Therefore, a strong bias towards quality and liquidity is key from this point forward.

In Japan, a v-shaped recovery is almost in sight, helped by a substantially improved outlook for significant increases in CAPEX this fiscal year.

This has been further helped by the fact many companies did not reduce their workforce in line with the declining outlook which was seen as temporary, which means industrial production should gain momentum and there are signs consumption has already rebounded.

In respect of emerging markets, a few countries are still overheating from the peaks at the beginning of 2011 with the economic activity continuing to decelerate. But the fundamental rate of growth of these economies is still substantially above trend, with notable exceptions being Mexico and Poland.

Consequently, most of Asia is moderating with strong resilience in the big economies such as India and China while the smaller ones are tending to be more volatile due to their overdependency on trade. Again liquidity is critical, or to reaffirm the words of Mr Spock: “There’s life Jim, but not as we know it.”