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Andrew Yeadon: Don't go on the defensive yet
It is interesting to listen to the investment debate at the moment. To my mind, views seem both entrenched and quite polarised. On the growth front, we have the V-shapers and the Ws. On prices, we have the inflationists and the deflationists. And on markets, as ever, we have the bulls and the bears, which incidentally, seem to me to always be the same people expressing the same views, regardless of the investment fundamentals.
Our baseline economic outlook lies somewhere in between most of these extremes. On economic growth, we believe that the world will recover towards an annual rate of 3 to 4 per cent next year, led by the emerging markets and Asia, and with the UK placed firmly towards the bottom of the league table.
Over the next couple of quarters, we expect the general tone of economic and corporate newsflow to remain positive, and we believe that corporate earnings will probably bottom this quarter and that 2010 profits are likely to be as much as 25 per cent higher than the rather depressed levels that will be posted in 2009.
On prices, we believe that big output gaps will most likely keep a cap on inflation for the foreseeable future and that the deflationary impact of fiscal tightening (government spending cuts) will probably mean that monetary policy will stay loose well into 2010.
Finally on markets, although the attractiveness is not what it was six months ago, when we take our regular hard-nosed look at valuations, we think they look fine and that there is scope for equities and corporate bonds to continue to advance and for commercial property prices to follow suit, albeit in the typically drawn-out, lumbering way that reflects the valuation process to which this asset class is subject.
So the policies of governments and central banks appear to be working brilliantly, underpinning the recovery and forcing investors out of low-yielding defensive asset classes such as cash and, in the process, dramatically lowering the cost of capital for companies.
It is evident that these ultra-loose emergency policies were put in place to avoid a complete meltdown in the financial system and the wider global economy and that at some point down the track they must be reversed.The next big risk then, will be how, and when, officials go about the business of normalising economic policy. Do it too soon and they risk extinguishing the awakening animal spirits that are essential for a sustained recovery. Leave it too late and we may very well face a world where inflation runs rampant. At the moment, policymakers are keeping their cards pretty close to their chest. We think that the right portfolio strategy, for now, is to stay invested in equities, corporate bonds and property and enjoy the benefit of this government-sponsored recovery in investment markets. A time will come when officials begin the process of watering down their stimulus packages, but in our view it is too early to adopt a defensive strategy within portfolios.
Andrew Yeadon is head of multi-manager at Schroders
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