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James Millard CIO, Skandia Investment Group

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SIG continues to favour emerging markets

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While Skandia Investment Group (SIG) has maintained its enthusiasm for emerging markets, other investors now appear to be returning to the region, albeit not to the same degree as last year.

SIG says within emerging markets there were further signs that China had slowed in response to tightening monetary conditions and that should reduce the amount of further monetary tightening required. It says that the policy induced slowdown would be welcomed by the Chinese authorities who had feared that the economy could overheat.
 
SIG believes that the slowing of growth rates is likely to reverse in the second half of this year as labour markets improve, thanks to the continuing health of the global corporate sector. SIG points out that the price earnings ratio in most countries has declined so far this year, as corporate profits have risen by more than equity prices. On the inflation front the firm believes that headline inflation is likely to peak later this year.
 
In bonds, SIG has reduced its overweight exposure to high yield bonds following their strong performance over the past few years, though the business remains heavily overweight to investment grade credit.
 
SIG Chief Investment Officer James Millard, say: “Having expanded at a very rapid rate in the early part of this year, there were signs that the growth rate of global manufacturing was slowing sharply.

"Although we expect the growth rate in the manufacturing sector to slow over the next few months we think the overall growth rate is to pick up in 2011H2."

Millard believes that headline inflation is likely to peak as food price inflation starts to decline later this year. He says that while headline inflation remains elevated on the back of food and fuel prices and core inflation levels have risen in most countries, they remain at “comfortable” levels especially in the developed world.
 
“We expect headline inflation levels to peak over the next few months as the rate of food price inflation falls. Food price inflation as measured in the year-on-year (YoY) terms is likely to start declining later in the year as last year’s food price increases start to fall out of the YoY numbers. With food prices making up a large part of the inflation basket in most emerging market (EM) countries, headline inflation in EM could fall late in the year,” says Millard.

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