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No “V”-shaped recovery in sight

Fund managers are cautiously optimistic about the economic outlook for 2010. Most of them expect the global economy to continue improving this year, but warned that the recovery is gradual.

BNP Paribas Investment Partners said that recessions accompanied by financial crises tend to be followed by sub-par recoveriesIn the context of this article, it refers to a lacklustre economic recovery or an economic growth rate that is below the average historical growth rate, usually seen when a rebound takes place after a recession..

Schroder Investment Management expects growth to be subdued in 2010 as consumer spending is constrained by the ongoing de-leveragingA term used to describe the repayment of outstanding loans to reduce the level of debt. in the household sector, tax increases and higher commodity prices.

Allianz Global Investors predicted a continued rise in global unemployment as well as low world economic growth of around 3% in 2010. Fullfledged recovery will only kick in when consumer debts are reduced.

Asian and emerging economies to lead the growth

Fund managers are more positive about the economic prospects for Asia and emerging economiesRefers to less developed economies like China, India, Brazil and Russia, with good growth potential and promising prospects to become developed economies like the U.S., U.K. and Germany. as compared to developed economies. 'The economic growth in Asia is likely to be stronger than developed economies such as the U.S. and Europe,' said First State Investments.

Lion Global Investors sees the current global economic recovery as being led by Asia rather than U.S. consumers, unlike previous recessions.

Henderson Global Investors said that 'growth will be faster in the emerging economies than in the West and market uncertainty is at a higher level'.

Aberdeen Asset Management however cautioned that 'while emerging economies, including those in Asia such as China, India and Indonesia, are fundamentally more sound and appear on the mend, their recovery may stall if they are unable to build up their internal sources of demand'.

Stock markets headed for a bumpy ride

Fund managers are generally positive about the outlook for stock markets but warned that the ride ahead will be a bumpy one although they do not expect markets to fall into the March 2009 lows.

'Although we are optimistic about the upside potential, it's important to realise that there will be volatility,' said Templeton Asset Management.

Henderson Global Investors sees the equity markets doing well, but will 'remain vulnerable to disappointing news'.

Fidelity International however warned that markets may see a correction in the first half of 2010. 'Growth rates are likely to cool off when headline inflationUsed to describe inflation in totality. The inflation rate is often calculated excluding volatile elements such as food and energy prices, which can distort the true value. The inflation rate excluding these elements is termed core inflation. Headline inflation is all encompassing, including the volatile food and energy elements. rates turn positive and central banks become less supportive'.

Fortis Investments also sounded a note of caution. While it sees equities continuing to head higher, it thinks that markets could struggle later in 2010 on the back of uncertainties over exit strategies for monetary policy and faltering growth.

While fund managers see headwinds and volatility ahead, they do not expect markets to retest the March 2009 lows, given the current low interest rates and the abundance of liquidity.

Equities still the preferred asset class for now

Most fund managers said that equities remain their preferred asset classA term used to describe investment instruments such as equities and bonds which are popular with investors. In recent years, we have also seen the emergence of new asset classes like commodities and real estate investment trusts, which have grown in popularity with investors. for now, although some said that they may rethink their position and may take profit in the later part of 2010, if governments and central banks signal that they are ready to unwind their stimulus plans.

UBS Global Asset Management said that assuming a baseline scenario of a 'U'-shaped recovery in 2010, equities remain attractive relative to bonds from a valuationsValuation is a measure of how expensive an investment is. An undemanding valuation means that an investment is inexpensive. All else being equal, an investment with a lower valuation is a more attractive proposition. perspective.

'Despite the recent equity rally, valuations on equities continue to remain low relative to previous historical periods and are at levels similar to those seen in 2002, after the tech bubble burst,' said UBS.

Phillip Capital Management however prefers a balanced approach consisting of equities, bonds and cash, as it is concerned that a second dip could happen if governments pull the plug on stimulus spending.

Best opportunities seen in Asia (excluding Japan) and emerging market equities

ING Investment Management commented that among equity markets, it prefers Asia (excluding Japan) and the broad emerging markets. This is because most economies in these regions have strong growth prospects and stand to benefit from a recovery in global trade.

First State expressed confidence that the Asia (excluding Japan) region will outperform other regions as 'Asian companies have stronger balance sheets and Asian consumers have a higher savings rate and the capacity to spend'.

UOB Asset Management is also positive on Asia and emerging markets in Latin America as 'they have proven surprisingly resilient compared to the weaknesses in the developed markets'.

Stock markets to watch

Prudential Asset Management is positive on China, Indonesia and Thailand as their valuations are undemanding. SG Asset Management's preferences are South Korea and Taiwan for their higher leverage on global recovery and Hong Kong where asset prices look poised to head higher.

Aberdeen Asset Management likes Singapore and India 'where there are clear regulatory frameworks and good corporate governance, as well as companies with stable business and sustainable competitive advantages'.

Positive on the commodity sector

Fund managers are generally positive on the outlook for the commodity sector despite the sharp run-up in prices.

Schroders cited low interest rates, U.S. dollar weakness, global recovery prospects, growing world population and climate change as factors in favour of the sector.

Gold which has seen a spectacular run-up was flagged out by quite a number of fund managers as an attractive investment proposition.

Lion Global said that it is positive on gold given the growing fiscal deficitsRefers to the shortfall in a government's budget when the revenues it collects (e.g. taxes) are insufficient to meet expenditures (e.g. payments to upkeep public amenities). and large debt burdens in developed countries, especially U.S. It expects central banks and other investors to gradually diversify their currency exposures away from paper currencies and towards gold. Lion Global sees this as a good hedge against inflation in the longer term.

Fortis Investments sees commodities doing well for cyclical (economic recovery) and structural (limited production capacity) reasons and is overweight on gold and agricultural commodities.

Phillip Capital Management also likes agricultural commodities for its long term prospects, with the energy sector ranking as its second favourite segment.

Key risk factors to note

Banks cautious lending stance, rising unemployment rates, overleveraged consumers in developed markets like the U.S. and U.K. and the possibility of government stimulus plans and U.S. dollar carry tradesRefers to currency trades where speculators borrow money in a low interest rate currency and buy higher-yielding assets in a different currency. The low-rate currency is usually the U.S. dollar and higher-yielding assets include high yielding bonds, currencies, emerging market equities and commodities. unwinding, were among the risk factors cited by fund managers for 2010.

The negative effects of rising commodity prices on consumer spending and the global economy, an asset bubble in China, protectionism and sovereign credit downgrades among some Western governments, were other concerns highlighted by managers.

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