Long term opportunities in credit, equities and property in 2008 & 2009
08 July 2008
The world economy will experience below trend growth as it recovers from a series of credit and inflation shocks. Investors will see long-term opportunities in credit, equities and property in 2008 and 2009, according to analysis published today Standard Life Investments, a leading investment house.
In the latest edition of Global Outlook, its quarterly investment view, Standard Life Investments examines the aftershocks of the global credit crunch, inflationary risks and the monetary responses of central banks, in particular in the emerging economies.
Andrew Milligan, Head of Global Strategy at Standard Life Investments, said:
"Financial markets are responding to a variety of imbalances in the world economy. The aftershocks of a global credit crunch and declines in commercial and residential property prices in various countries are combining with an inflation shock, and in some economies a monetary response. The resulting volatility has created both risks and opportunities for many investors.
"We have considered these issues in considerable detail and our analysis has reached the following broad conclusions. Firstly, that the global credit crunch can be contained by the authorities but its resolution will take more time and involve further re-capitalisation of the financial system. Secondly, inflation risks will be dampened by a lengthy period of sub-trend growth for the world economy, with continued risks of recession in some countries such as the US, the UK and parts of Europe. Thirdly, investors should pay more attention to the decisions by central banks in emerging economies, as policy errors are possible.
"Although growth risks are to the downside, there are important counter-weights. Company balance sheets remain in a good state, in marked contrast to say 2000, and hence firms do not need to be aggressive in cutting back on either staff or business investment. Emerging market economies will slow into 2009 but they will continue to show a clear pair of heels to OECD economies, as much of their investment is linked to long term infrastructure and development plans. Lastly, the ability of sovereign wealth funds and other GEM investors to recycle their trade surpluses back into OECD companies and markets remains remarkably strong. Such trends mean attractive stock picking opportunities will continue to exist.
"Volatility in markets means that valuation opportunities are starting to be seen, whether in sectors such as financials or in markets such as credit. Earlier this year, we altered our House View, moving to Neutral in US Treasuries and Heavy in UK corporate bonds. This helped our funds avoid the sell-off in US bonds while buying into the rally in credit after the Bear Stearns rescue. We continue to monitor the situation regarding other valuation opportunities, which we expect will appear in credit, then equities, then property, over the medium term. The House View remains Heavy first in Bonds, then in Cash and finally the more defensive equity markets, where valuations such as dividend yield are more supportive. UK commercial property, European equity and emerging equity markets remain Light or Very Light, bearing in mind the pressures they face from tighter monetary policy in the current environment."
