1. Which current market opportunities are you most excited by?
2. What major market risks are you most concerned about?
3. Do the risks outweigh the opportunities at the present time?
Richard Turnill
Head of global equity
BlackRock
1. There is evidence of a broad-based recovery across many regions; China is particularly exciting. Encouraging signs include the increase in money supply, an improvement in a number of business confidence indices, and an increase in electricity consumption. We are placing increasing emphasis on stocks which give us exposure to a recovery in Asian demand. This includes Chinese stocks like the telecom company China Mobile or the financial services provider China Life, but also Western consumer brands like Swatch.
2. Two risks to watch out for are the possibility that the growth in output is a reflection of a short-term inventory cycle, and not underlying consumer demand; and the risk of an early reversal of monetary stimulus policy. 2001 saw a temporary spike in output as companies that had run down stock worried they might have gone too far and started to rebuild inventories. The second risk is that governments respond to a rise in demand by taking their foot off the accelerator too soon in terms of monetary policy. This is what we have seen happen in Japan.
3. The short answer is yes. Equities still look compell-ing compared with other asset classes, especially cash and treasuries. We are focusing on stocks with emerging markets exposure, continuing to concentrate on companies with strong balance sheets and increasing our emphasis on value particularly companies with a low price to book.
David Jacob
CIO, listed assets
Henderson Global Investors
1. I think the market offers significant opportunities, but these should be viewed in the context of what level of returns will be realistically achievable. Significant opportunities exist, particularly for long-term investors. For example, many corporate bond sectors offer yields far in excess of any realistic default scenario. In equities, there are companies with solid balance sheets, attractive dividends and good valuations that have been sold as a result of the general deleveraging and risk aversion, yet many offer a sound medium to long-term investment opportunity.
2. One of the greatest risks is that there may be more deleveraging to come. This will make returning to market levels pre the financial crisis, difficult, if not impossible, in the medium term. Other risks are economic: governments are increasingly involved in not just financial markets, but also in industrial sectors through large bailout packages and quantitative easing. There is increasing risk of a policy error as governments defend against a depression.
3. This is dependent on the time horizon. Over the medium to long term there are good opportunities; however, expectations of future returns may have to be more realistic than in the previous decade. Short to medium-term risks are centred on companies’ ability to survive the economic slowdown; long-term risks are driven by government policy errors and their potential impact on returns.
Chris Taylor
Head of research
Neptune Investment Management
1. After their likely low point reached during the first quarter of 2009, the world’s stock markets have collectively staged a powerful rebound that should turn out to be more than just another bear market rally that peters out. Emerging markets have been at the forefront of this rebound, with Russia and China looking particularly exciting.
2. The steep drop in demand that many industries saw in Q4, 2008 will savage 2009 corporate operating results due to substantially lowered capacity utilisation and margins, which will in turn lead to massive extraordinary costs as companies right-size their organisations to meet lower demand levels. However, the latter should underpin significantly-better 2010 results as breakeven points will have been lowered and no more extraordinary costs incurred.
3. The background trends that have consistently driven equity prices lower over the last two years have changed, aided by the coordinated global policy response by government and central banks. Specifically, the US banking crisis has arrived at its point of resolution and company profit should not fall any further.
With downgrades in earnings now much more realistic and the lows of the first quarter in all probability as severe as historic precedent, the opportunities on the upside are significant and we continue to build our equity positions accordingly.
Andrew Milligan
Head of global strategy
Standard Life Investments
1. We remain positive about the outlook for investment grade corporate bonds; while many investors have begun to buy these assets, there is still value in them. The sizeable stimulus from much easier monetary and fiscal policies should allow the economic recession to end later this year, with a below trend recovery in the global economy into 2010. These arguments also suggest that investors should look for value opportunities in equities with a solid dividend yield, for example equity income funds.
2. There are a range of risks facing investors. Some are economic – will the surge in unemployment cause many households to tighten their belts, forcing the savings ratio too high? Some are monetary – what is the level of conviction among central bankers in making quantitative easing policies work?
3. The house view is positioned cautiously, bearing in mind the many obstacles facing markets from a lengthy period of debt deleveraging. There are upside risks, if investor confidence gathers pace, but there remain downside pressures too. Many of the best opportunities lie in specific stock picking, across corporate bonds, equities and commercial property, rather than broad brush asset allocation, unless an investor wishes to take a firm view now about several issues, for example, how high inflation could reach over the coming business cycle.
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