Barings still waiting to enter equity markets

In spite of continued concerns about the fragility of European markets and the recent downgrades of growth forecasts for the US and the UK, the Multi-Asset team at Baring Asset Management (Barings) remains poised to move back into equity markets should they see the policy triggers they are waiting for.

“In view of the deteriorating economic outlook, however, we see no reason to move ahead of the event.  Equities are cheaper and our equity risk premium work suggests that both the UK and US are decent value even on a modest fall in earnings per share.  However, they are not yet at fire sale prices and at present we cannot see a firm base level being established.”

Speaking about the outlook for the UK and US, Stanion remarked on how both markets are poised to resume their QE programmes.  Stanion continued, “Growth forecasts have been revised down again and while a recession is not yet the central scenario in either country, the pressures for more stimulus are rising in both.

“Mr Obama’s US$450bn package of employment tax cuts, infrastructure spending and unemployment insurance initially provoked a positive response and even attracted Republican support.  Unfortunately, more recent speeches reiterating the demand for more equal taxes on the super-rich have ensured this Republican support has evaporated.

“With solutions unlikely to get through increasingly fraught party politics, the burden of stimulus lies with the Fed. The sharp market sell-off following its latest stimulus measure shows how fragile nerves are, as investors focused on the Fed’s downbeat assessment of the pessimistic slant on the economy.

“Similarly in the UK, authorities have given clearance to the Bank of England for a further tranche of quantitative easing, but the outlook is also very delicately balanced.”

In Europe Barings believes the outlook remains very negative. Stanion continued, “At the moment, the northern European states are wary of conceding too much when their domestic populations are increasingly hostile to any form of bailout.  Distrust for Greece is running at very high levels given the history of fraudulent statistics and the failure to complete any of the conditions of last year’s bailout.  It therefore looks like further pain will be imposed on Greece in the form of job cuts and revenue raising measures before the next tranche of money is released to them.

“Almost certainly this will not be the end of the saga and we fully expect Greece to breach the conditions of the second bailout by the time that second tranche is due in December.  At some point the country has to default on the bulk of its liabilities.  We very much hope that the European authorities are planning for this eventuality.”

Barings said that the longer this process goes on, the more scepticism will be applied to the next weakest candidates.  Spain and Italy are looking precarious, and while the printing press remains an option, the cost for this approach would be a much weaker euro and higher inflation.

Within Barings’ multi asset portfolios, the company has maintained a very low risk profile. Despite the derisory deposit rates available, cash holdings are at historical highs, and Barings also maintains strong exposure to safe haven government bonds, although it has recently taken profits in longer dated government bonds and switched shorter.

Although emerging market bonds have recently come under pressure as investors desert all risk assets and retreat to the US dollar, Barings is encouraged by the recent actions of Indonesia which actually started to use its overseas reserves to both help stabilise the currency and bond market.  As an asset class, Barings believes the better debt dynamics of the emerging region will eventually prevail.