Q. How much worse can the European debt crisis get?
A.
The European crisis potentially still has a long way to run, with the crisis now affecting the core as well as the peripheral economies. While the euro zone leaders have said they will effectively do what it takes to defend the euro, actions speak louder than words. The politicians have been guilty of talking too much and doing too little over the last year.
Going forward, there is still a very real risk that things could get substantially worse in the euro zone, with serious ramifications for the global economy.
Q. Where is the global economy particularly vulnerable? What areas should investors watch?
A.
The euro zone is key, and Italy, in particular, is in the firing line. The Italian bond market is the third largest in the world, and there are doubts whether it would be possible to bail it out. The risks are significantly to the downside.
Outside of Europe, there has actually been better news on improving growth in the United States and falling inflation in China.
Q. Will the euro survive?
A.
We think that the euro will survive because there is no mechanism for any country to leave. In addition, the cost to both the countries that leave and those that stay would be huge, with the cost of exit far higher than the cost of staying.
Any further deterioration in Europe would probably lead to euro weakness against the U.S. dollar and other currencies. By many measures, the euro remains overvalued against the dollar and other currencies. We expect Asian currencies to perform well, although they could weaken if a major crisis developed.
Q. In the current environment, what should investors be buying, or selling?
A.
We still see great value in equities, particularly relative to cash and bonds, which both look particularly unattractive over the next couple of years. With this in mind, now is not the time to panic and sell out of equities. With any investment, the right time horizon is key, and equity investors need to exhibit greater patience than they have done in recent years.
What is important is to have a sensible, diversified portfolio across all asset classes that is designed to meet an investor’s needs in line with their risk profile.
Q. Where do you see the best investment opportunities?
A.
China is looking very attractive for the coming 12 months. With the prospect of slowing inflation, the central bank has the ability to ease monetary policy, a situation developed countries could only dream of. In addition, we see valuations are favorable, particularly after the recent sharp sell-off, and global investors are underweight China, which should create attractive upward pressure when investors return.
Q. What about commodities? Has their rally run its course?
A.
Commodities do offer compelling investment opportunities, and there is certainly no drought of likely influences that can impact prices over the next 12 months. We see challenges faced in production and geopolitical risks, not to mention the overriding macro headwinds threatening global economic growth coming from the developed world, and Europe in particular. Gold looks potentially in bubble territory and trading as a safe-haven asset, but, nevertheless, risks remain for price appreciation in the near term, given the uncertainty in the macroeconomic environment.
Q. Is Asia the answer, or will Asia stall and enter a period of prolonged slowdown?
A.
We remain very comfortable with the outlook for Asia and remain overweight. The ongoing nature of the euro crisis is causing risk aversion across the globe, and, as such, some investors are shunning Asia and focusing on developed markets such as the United States.
However, longer term it is clear that the global economy is going through a structural shift and rebalancing towards Asia and the emerging markets. This will give Asian equities a strong tailwind as investors begin to strategically increase their weights to the region.
Article source: http://feeds.nytimes.com/click.phdo?i=51741c373e157b88179a241bf431fe35
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