Skandia Investment Group (SIG), the investment management business of Old Mutual Wealth Management, remains optimistic on the outlook for Asian, in particular Chinese, equities.
In China, inflation rose to 5.5%, with rising food prices the main driving force. Although inflation in China may rise over the next month or two, SIG expects it to fall towards the year end as food price inflation falls. Recent comments from Chinese Premier Wen Jiabao suggest that July’s interest rate hike could be the last reinforcing SIG’s view that the Chinese economy is set to achieve a soft landing.
Skandia Investment Group remains optimistic on the medium term outlook for equities, but has moved from a positive to neutral position because of continued uncertainties in Europe. It has reduced its exposure to bonds because of the low level of yields and it remains heavily overweight non-government bonds and emerging market equities.
At the end of June, the Greek government reshuffled its cabinet and successfully passed its new budget which will impose significant further fiscal tightening. The passage of the budget should allow Greece to receive funds under the 2010 bailout while the EU and the IMF will start to consider a new bailout. While the risk of a near term default has receded, significant challenges remain and Greece is likely to restructure its debts at some point.
By ‘kicking the can down the road’ it is hoped that other peripheral economies and European banks will improve their financial positions and be better able to withstand the shock of a Greek default.
James Millard, chief investment officer at SIG, says: “Comments from the Chinese Premier suggest that July’s interest rate hike could be the last. This could lead to a re-rating of Chinese equities. Emerging markets in general continue to grow more rapidly than developed markets, while having much lower government debt levels.”
“Although we think that many of the drivers of the equity market remain favourable, we are concerned that further uncertainty over Greece could undermine markets. In addition, the soft patch is proving longer lasting than we expected. As a result our model portfolios have a neutral exposure to equities.”
“We further reduced our exposure to bonds, largely on valuation grounds. Interest rate markets have significantly scaled back their expectations for interest rate rises in the main markets. If the global economy picks up in the second half of the year as we expect, yields could rise further.”
