September 28, 2012 / 1:37 PM / 7 years ago

INVESTMENT FOCUS-Tug of war into Q4

By Mike Dolan

LONDON, Sept 28 (Reuters) - Take on a little risk, maybe, but not too much.

This extraordinary lack of conviction among global investors about the remainder of 2012 illustrates just how unpredictable the investment horizon has become in the “tug of war” between unprecedented stimuli from the world’s big central banks and the chronic drag of a deep-seated global debt hangover.

With refreshing candour, Stephen Jen of the eponymous hedge fund SLJ Macro Partners reckons it is almost impossible now to predict the short-term direction of global markets.

“Right here, right now, I am not too sure where risk asset prices or the dollar goes,” Jen said.

“The tug-of-war between money printing — good for risk — and the real economic fundamentals — bad for risk — is too intense for me to make a call with confidence. I won’t stand in the way of the Fed and the ECB but remain very sceptical of the view that wealth can be created through money printing.”

They may not say so as baldly but that sums up the thoughts of many asset managers heading into a murky final three months of the year.

A less anecdotal version of the same equivocal feeling is seen in this week’s Reuters asset allocation poll.

After all the bond-buying and money-printing fireworks from U.S., euro and Japanese central banks during the month, global equity holdings were actually pared back in September even though risk aversion also ebbed with a clear reduction in cash.

While central banks may have inspired a search for better returns beyond the negative nominal and real yields in deposits, money funds and top-rated government debt, there’s little bullishness here.

A preference for the relative safety of good balance sheets over growth-dependent securities perists. Many investors would still rather hold a blue-chip company’s debt than its equity and many countries’ corporate credit over their sovereign bonds.

Aggregate year-end equity forecasts tend to bear that out. Even though Reuters latest polls of equity forecasters worldwide offered a positive consensus for most markets, the 1,480 point end-year call for Wall St’s S&P 500 is only two percent up from here and barely above mid-September peaks.


Of course, this week saw a sour end to the otherwise policy-inspired gains of the third quarter as familiar euro tensions were rekindled by Spain’s shaky finances, fresh austerity and Madrid’s wavering over an aid programme needed for European Central Bank support.

After gains of up to 10 percent on world equities during the quarter, there may just have been some timely profit and a healthy reality check. Yet the complicated Spanish story also provides a timely snapshot of the wider conundrum of weakening demand and political risk placed against extraordinary and determined policy intervention.

Do you, for example, take your cue from the deepening in the euro zone’s fourth and the world’s twelveth largest economy or the likelihood that a bailout programme will unleash the ECB?

“If Spain were to delay the aid request the “feel good factor” that has supported markets in August and partially in September would fade but would not erase the progress made so far,” said Andrea Conti, head of macro research of Eurizon Capital, Italy’s biggest asset management firm.

And for others, the synchronised monetary supports provided by the ECB, U.S. Federal Reserve and Bank of Japan marks a turning point even if you remain selective on where you invest.

“The majority of central banks are in total, outspoken reflationary mode. That’s a big story,” said Didier Duret, chief investment officer at ABN Amro Private Banking.

On the other side of the coin, long-term global markets bear Albert Edwards at Societe Generale cut his equity weighting recommendation to the lowest possible of 30 percent — the first time since May 2008.

“The Fed is pursuing the same road to ruin as it did between 2003-2007,” he said, arguing that another flirtation with recession and deflation is likely and then a long-term inflation problem will unfold.


And with the fourth quarter bringing the U.S. election and looming “fiscal cliff” into focus alongside China’s protracted leadership change and ongoing euro tension, it’s not hard to understand at least some hesitancy.

For all the glimmers of hope in U.S. housing and confidence, there’s little sign yet of any turnaround in the global economy at large. The International Monetary Fund said this week it was set to lower its global growth forecasts again next month and private forecasters are doing the same.

Although arguing the Fed’s money-printing would eventually lift the U.S. economy and asset prices, Deutsche Bank economists on Friday cut their 2013 world growth forecast by almost half a point to 3.2 percent - below the existing 3.5 percent IMF call.

And trimming their 2013 forecast for the faster-growing emerging economies earlier this week, HSBC’s global economists said the long-term economic funk in the western world was now more than just a demand problem but one with deep supply-side problems in labour, credit and commodity markets.

“Investors don’t quite seem to have grasped the impotence of monetary policy in a world of supply-side problems,” HSBC told clients. “From labour market weakness to fiscal nightmares, our growing economic difficulties cannot be easily resolved simply by a wave of the monetary magic wand.”

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