Investment Strategy Paper

Download ISP - March 2011

ISP executive summary

The economic recovery in the United States is building momentum. The recovery remains productive sector led, while high unemployment and a housing market that is still struggling to form a solid base continue to hold back consumption. Our expectation of 3% growth this year is consistent with our forecast of global growth of around 4%.

Improving economic conditions means the focus is now returning to stimulus exit strategies. Markets are pricing in interest rate increases in the United Kingdom in a few months, while the ECB has signalled an interest rate increase as early as April. In our view interest rate increases risk undermining a recovery that is only just gathering momentum. Ideally, fiscal policy needs to do the bulk of the work as less accommodative policy settings become desirable.

Inflation remains the key risk in emerging markets and authorities there continue to take appropriate action. In the face of still robust growth in China, India and Brazil, further monetary policy tightening is expected in order to keep inflation in check.

Significant structural challenges remain for the global economy.  There is still no satisfactory long-term solution to debt concerns in Europe. Also the prospect of a permanent upward trend in commodity prices presents new challenges for monetary policy.

Our portfolios remain overweight growth assets, largely reflected in a 5% overweight to global equities. We are neutral on emerging markets. In Australasia we continue to prefer Australian equities to NZ equities based on current valuations, and the growth outlook. We are slightly overweight commodities with the positive fundamentals of tight supply and improving demand. We remain underweight listed property, with a strong preference for equities within the growth mix.

The portfolios remain underweight global bonds despite the recent sell-off, as the medium-term risks to this asset class remain high in a world of rising public debt levels and valuation models continue to strongly favour equities to bonds. We are short the NZ dollar overall, with short positions against the USD and Sterling, more than offsetting long positions against the Australian dollar and Yen.

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For further information please contact:

Ralph Little, Spicers Public Relations

Telephone:  09 374 1845 

Email: ralph.little@spicers.co.nz