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Multi-manager’s View: Political inertia forces central banks to take the lead

Following a strong start to the year, we find ourselves questioning whether the momentum of this market can continue.

The economic backdrop globally is mixed; Europe is struggling with the UK in only slightly better shape. Meanwhile China and Asia lead the emerging markets and the US continues to show decent signs of growth, assisted by continuing loose monetary policy from the Federal Reserve.

Japan has also confirmed larger than expected further support from their own central bank which is needed to meet the stated goal of 2 per cent inflation.

We do feel that the diverging relative fortunes of the US and European economies will continue and the impact to confidence in Europe of the perceived new template for banks to be recapitalised should not be underestimated.

The complacency from European leaders over the sovereign debt crisis continues, and it remains extremely difficult for debt/GDP ratios to ever recover when economies continue to shrink and a default or devaluation is not an option thanks to Eurozone membership.

This fact means that countries in peripheral Europe will struggle to exit this spiral for a long time to come, particularly given the apparent unwillingness of politicians to use measures to stimulate growth.

The latest unemployment data for the Eurozone showed unemployment to be 12 per cent, a new high, and youth unemployment, at over 20 per cent remains a big concern.

This contrasts with the US unemployment rate, at 7.7 per cent and on a falling trend; the big difference between the US and Europe is that the US has a central bank which is proactively targeting unemployment whilst the ECB concerns itself with providing a backstop for sovereign debt.

Europe, as a bloc or individual nations (and this includes the UK), continues to have no coherent policy on stimulating economic growth which is very surprising.

Whilst politicians continue to stall, we expect markets to remain supported by the actions of the central banks who continue to use unconventional measures to stimulate money supply and drive investors into risk assets.

The US Federal Reserve and Bank of Japan have aggressive policies in place; the Bank of England is likely to extend further the use of QE and other measures over coming months and the pressure is growing on the European Central Bank to loosen policy further.

We do expect this period of extremely loose monetary policy to continue for a long time yet and this is a big support for equity markets.

The current mood remains reasonably optimistic and while the market may be a little ahead of economic fundamentals, we do think some regions are showing decent signs of life.

We recognise that following a very decent quarter of returns, newsflow needs to continue to positively surprise to maintain the momentum in markets.

The politics remain a concern, with tensions increasing in Korea, ongoing stalemate in Italy and the fallout from the Cyprus bailout leaving sentiment a little dented.

However, the economic backdrop does appear relatively benign and provided we see a continued pick up in data and a supportive earnings season, we do expect markets to continue to make progress, albeit with varying degrees of performance across regions.

Further outperformance of risk assets over ‘safe haven’ assets does seem likely over the medium term, supported by strong corporate fundamentals, a likely escalation in M&A activity and a belief that the selling of equities from pension funds is largely over.

Whilst we believe it is too early to call a ‘great rotation’ back into equities from fixed income, even a small reversal in the trend of recent years will be a positive force for equities.

Rob Burdett is co-head of multi-manager at F&C Investments

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