The Sarasin Group in its latest Strategy Outlook contrasts the policies and actions of double-dip fearing central bankers in the West with inflation-fearing policy makers in the East. Added to this, an oil price shock in the last quarter and ongoing disruption to global supply chains in the aftermath of the Japanese earthquake and nuclear disaster helps explain why financial markets are having a bout of nerves.
However, it points out most equity indices remain in positive territory for the year, while market volatility is just a fraction of the level seen in previous crises. With another quarter of strong earnings and dividend increases behind us, as well as near-record corporate cash flow, the Sarasin Group continues to highlight global blue chip equities as the asset of choice for 2011.
A micro version of the dilemmas facing double-dip-fearing bankers in the West and inflation-fearing policy makers in the East is playing out in Europe; surging growth in the core is meeting a near complete breakdown in the Greek debt markets, warnings of downgrades for Italian bonds as well as renewed political and economic strife in the rest of the European periphery. The European Central Bank (ECB) has found itself most uncomfortably in the middle, advocating further budget consolidation from the periphery and more financial transfers from the core. The Sarasin Group indicates that it is likely the ECB will have to prepare for some measure of restructuring of Greek and potentially other peripheral Europe debt with the probable proviso that this is accompanied by further fiscal transfers from the core to the periphery.
“It’s not just markets, but central banks that are also acutely sensitive to signs of economic weakness. Overstimulation is the stated objective of the Federal Reserve to ward off deflation: there is simply too much at stake to risk a premature exit. If current signs of economic weakness persist, then we expect the Federal Reserve to not only push back any timetable for exit from quantitative easing, but also look for new ways to stimulate growth,” Guy Monson, Chairman of the Investment Policy Committee said.
“In spite of contrasting economic scenarios between East and West, the global equity earnings machine simply continues to march on, with another estimate-beating quarter of earnings matched by some stunning dividend rises and cash flow forecasts. Our policy therefore remains the same, with global blue-chip equities continuing to be the best each-way bet in the face of policy uncertainty,” Burkhard Varnholt, Chief Investment Officer, said.
In Asia and the emerging world, on the other hand, fear of inflation and the crippling costs of subsidy programmes to protect consumers from higher energy costs have given way to tougher money policy and a greater tolerance of currency appreciation. Bank reserve requirements are being tightened again, interest rates are rising, and politicians are speaking of the risks of inflation almost daily, despite the partial correction in energy and commodity prices over the last weeks. The Sarasin Group expects further monetary tightening which should lead to a slowdown across the region.
The Sarasin Group concludes that the fact that equity markets have only retraced their gains of this year seems a rather modest result in the face of such challenges, especially as market volatility has remained at just a fraction of the levels seen after the Lehman crisis or the first Greek bond collapse. Much needed falls in commodity and energy prices have helped and will continue to do so.