Outlook for 2009 - timing is key
03 December 2008
Long term value exists across a range of asset classes; the key issue is when and how this might be released, according to analysis published today by leading investment house, Standard Life Investments.
In the latest edition of Global Insight, its monthly investment view, Standard Life Investments examines a variety of factors that need to come together before investors can see the end of the equity bear market including effective monetary, fiscal and regulatory policies, stabilisation in earnings estimates and the housing market, and sufficient recapitalisation of the financial system.
Andrew Milligan, Head of Global Strategy at Standard Life Investments, said:
"Financial markets are expected to remain volatile for some time, as they take on board two sets of issues, the credit crisis and the economic crisis. Government actions in September-November have gone a long way towards stabilising the largest financial institutions, such as Royal Bank of Scotland or Citigroup. Nevertheless, the full scale of potential losses facing the financial sector in the US, the UK and Europe remains a major hurdle.
"It is certainly the case that the authorities have finally recognised the economic and financial dangers and begun to respond. Nevertheless, governments still face a variety of problems. While official interest rates have been cut sharply, and more moves are likely in coming months, there are few signs that effective interest rates paid by households and companies have come down significantly. In these circumstances, it is no surprise that the housing market continues to weaken while companies are cutting back on major capital spending projects. Accordingly, the House View expects that in 2009, some central banks may shift away from focusing on interest rates towards quantitative easing, namely actions designed to boost money supply growth or alter the shape of the yield curve, for example by central bank purchases of private sector securities.
"Fiscal policy will become an important factor. As the experience of Japan in the 1990s showed though, such action needs to be both large and well planned. There are dangers that packages are too small to have much of an impact, and stimulate household savings more than consumption. Nor should regulatory policy be ignored in this analysis. Specific measures can support certain sectors. There are potential downsides though. Firstly, it is clear that government rescue packages are evolving as circumstances change, so some changes can appear arbitrary. Secondly, a groundswell is building in the political arena for more regulation of the private sector, with potential implications for future stock market profits.
"The net result of this stream of bad economic news, and uncertainty about the policy outlook, has been the creation of long term value across a range of asset classes; examples include investment grade corporate bonds, inflation linked debt, or parts of the stock market. Recently, the Cash weighting has been lowered to Light in House View portfolios; this reflects the efforts which all central banks are taking to reduce official interest rates considerably. Those investors looking for yield will need to examine investment grade corporate bonds, high dividend paying equities with solid cash flows, and government bond markets where longer dated bonds will prove to have yields somewhat higher than bank rates.
"A key issue for investors in the coming year will be the battle between the economic headwinds, in terms of the credit squeeze, defaults and earnings, versus the efficacy of the growing policy response. Our House View warns that there are still risks ahead, in terms of policy mistakes, deflation becoming entrenched, or further banking sector problems. Hence, our House View remains defensively positioned into the New Year, awaiting positive signals from a series of valuation, policy and economic triggers before moving back into riskier assets."
