Investment Strategy Paper

Download ISP - September 2010

ISP executive summary

The developed-world economic recovery has entered its most challenging stage – the transition from an inventory cycle and stimulus driven recovery to one that now relies on the strength of final private demand. It is proving to be hard work for countries such as the United States, although we believe fears of a double dip recession and deflation are overdone.

Emerging markets continue to be the driving force of the global recovery with the new risk for some of these countries, including India and Brazil, being the risk of overheating. Containing inflation is the new challenge for policymakers in these countries. Growth in China is slowing but is simply returning to a more sustainable level.

We believe late 2010 and early 2011 to be the weak point in the recovery, but momentum will start to build again from mid-2011. But more than the normal number of risks remain, indeed considerable work still needs to be done to cement in an enduring economic recovery. That requires further work on a permanent rebalancing in global demand and the continued rebuilding of the global financial system.

Our portfolios remain overweight growth assets, chiefly emerging markets and Australian equities, with higher trend profit growth and decent valuations the two main reasons. The portfolios also remain underweight global bonds even though we don’t subscribe to the US bond bubble story. There are a number of factors holding down bond yields in the right here and now, but further out, upside risk to yields dominate. However, ultra low bond yields will be a catalyst for M&A activity which could provide a boost to stock prices. We have made no changes to the portfolios as a result of the Christchurch earthquake. We don’t expect the earthquake or the collapse of South Canterbury Finance to affect mediumterm GDP growth or impinge on New Zealand’s fiscal position to a material degree.

Bevan Graham Keith Poore
Chief Economist Head of Investment Strategy

Keith Poore
Head of Investment Strategy

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Ralph Little, Spicers Public Relations

Telephone:  09 374 1845 

Email: ralph.little@spicers.co.nz