LONDON, 12 January 2004 — Fears that last year’s pick up in the world economy would be short-lived have evaporated in recent months. Boosted by tax cuts, other grants as well as buoyant public spending, the US grew over 2 percent (or more than 8 percent) in the third quarter. Subsequent data, for example those for he leading indicators or industrial production, point clearly to an ongoing expansion.
That Asia is growing much faster than the rest of the world has long been recognized. However, the extent to which trade flows have picked up along the Asian Pacific rim in 2003 is striking. Also, optimism in business circles has definitely improved in countries such as Hong Kong, Thailand and Malaysia. Property prices have firmed and credit conditions have improved.
Even in the structurally depressed economies of Japan and Germany, the more positive turn in sentiment is remarkable. The German IFO index of sentiment has risen back to levels not see since the early part of 2001. In Japan, where buoyant Asian import demand is boosting both exports and industrial production, the Tankan survey of the manufacturing sector has now inched back into positive territory.
Thus the unknowns for 2004 relate to the strength of the ongoing recovery rather than to whether (or not) it will continue. We incline to the view that there will be some modest acceleration from here. As neither the US nor Europe have experienced a sharp recession in recent quarters, the recovery process is likely to lack momentum but the alternative case for a stronger recovery is easy to see. First, the fast-growing Asian region, which also now clearly included India as well as China, is far more important than 10 years ago. Also, in contrast to the last cyclical upturn in the early 1990s, Japan is not experiencing the immediate aftermath of a stock-market bubble. Nor is Germany confronted by very high interest rates.
Our assumption of a continuing, but moderate, recovery is favorable for investment returns as markets should be able to look forward to an extended period of improving growth without the fear of an imminent rise in rates. Our investment strategy has not changed greatly this month. Although cyclical factors favor equities, we continue to view this asset class as fundamentally expensive and our 30 percent commitment is below what is common in many “balanced” portfolio.
While bond markets can look forward to some further re-rating of lower quality issues, the outlook is less good in the investment grade sector, where markets put in a major top in mid 2003. From here, prospects are for trading rallies against an unfavorable longer-term trend. Rather than let our cautious commitments to both bonds and equities imply a high cash position yielding very low rates of interest, we continue to emphasize alternative investments, especially hedge fund of funds products, which we believe can generate significantly higher returns that cash with relatively little risk.
Our investment strategy is aimed at producing attractive returns over a rolling 12-month period. While the immediate cyclical environment favors equities, prospective returns over the longer term look modest. Rather than allow a cautious stance with regard to bonds and equities be reflected in a large low-yielding cash position, we have a significant allocation to low-risk alternative investments. We recommend just 5 percent in cash.
(Habib F. Faris is vice president at Clariden Bank, London)
(The information contained herein is for information only and should not be construed as an offer or a solicitation to purchase, subscribe, sell or redeem any investments. While Clariden Bank uses reasonable efforts to obtain information from sources, which it believes to be reliable, Clariden Bank makes no representation or warranty as to the accuracy, reliability or completeness of the information.)
