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Barings awaits further pessimism before upgrading risk assets

ER - Analyses de marchés
ABONNÉS
Barings remains extremely cautious on the outlook for markets as economies fail to show any signs of real growth. Andrew Cole, director of asset allocation, commented "At the moment it feels like the markets are engaged in a malevolent version of musical chairs and that when the music stops yet another country will be found wanting. Greece has been a serial loser for much of the last 18 months, later joined by Ireland and Portugal. But the tempo has been rising to a crescendo recently and each week that goes by yet another country finds itself the subject of hostile attack with no means to defend itself. We've seen this in Italy and Spain, then the US and, most recently, France."

Andrew continues, "The markets looked at the latest initiatives out of Europe and the US and threw a tantrum. All the political initiatives are coming too late, lack comprehensive support, and bring confirmation of slower growth through fiscal tightening and bank balance sheet regulation. None of them address the microeconomic barriers to growth, or use the limited resources of government to offer any meaningful incentive to the private sector to step in. Confidence is ebbing away across the whole of the North Atlantic. All of the policy levers have been pulled - fiscal pumping, zero interest rates, and quantitative easing - but collectively they have achieved very little in the way of real growth. Fiscal retrenchment now fills the horizon as far as the eye can see, as markets demand that government debt levels are brought under control."

Andrew speaks specifically about the daunting future facing France: "This country has a government debt to GDP ratio of over 80%, which has risen remorselessly from around 15% in the mid-1970s. It begs the question of what would French GDP growth rate have been if the government had not been continually pumping up activity. More worrying for the French elite is the knowledge that they have never in 40 years faced down the vested interest groups and undergone a period of austerity in public spending. The latest Franco-German deal is perhaps a step forward but it is still less than the market was looking for."

In the US, Barings highlights that the Fed Loan Officers survey has been trending better, but confidence there is also fragile and the surveys were carried out before the final dramas in Congress and the S&P downgrade of US government debt. Andrew adds, "The Fed has acted to try and stem market jitters by committing itself to keeping rates at near zero levels for at least two more years and also publicly discussing new initiatives in the sphere of quantitative easing. This may well raise excessive expectations ahead of the Fed's Jackson Hole annual symposium at the end of August when Chairman Ben Bernanke will make a major speech. Certainly, another round of quantitative easing in the US (or UK for that matter) would give the markets a short-term sugar buzz, but investors are likely to be very sceptical of its ability to produce sustained real growth."

With regards to asset preferences, Barings remains underweight to equities because of concerns over the growth outlook and corporate profitability, however they do not rule out a policy change mid-month.

Andrew concludes, "The market may be expecting too much out of the Fed's Jackson Hole symposium; after all, it is quite possible that all policy changes that will be made have already occurred, but the market has just overlooked their true implications. Given the lower trading volumes in August, we would like to see a more convincing bottom achieved and signs that the market has fully embraced a more pessimistic outlook before upgrading risk assets such as equities.

"There are conditions that would see us quickly upgrade such as a sharp decline in oil prices as this would help restore some buying power to western consumers. Elsewhere, a major initiative to boost domestic demand in China - albeit a remote possibility - would also greatly help."

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