2013: US can be catalyst for global growth, says Barings

On-going issues in the eurozone and the looming US fiscal cliff will create an uncertain environment for investors until the beginning of 2013, according to Baring Asset Management.

However, Barings believes that improving fundamentals around the US housing market, a potential shift in sentiment towards the US’s vast natural gas reserves, appetite from US pension funds for emerging market equities and debt and stabilization of fundamentals in China could help the global economy and provide the necessary catalysts for growth and for a positive market dynamic.

Marino Valensise, chief investment officer at Baring Asset Management, said: “We believe that the US will play a significant part in the global recovery story. We are convinced that the US will be one of the main drivers of growth in 2013 despite the looming ‘fiscal cliff’. We expect that the fiscal cliff is resolved relatively easily and quickly in 2013, with little permanent damage to consumer or business sentiment.”

Housing affordability in the US has steadily improved since 2007 and there is a declining number of mortgage delinquencies. Low financing costs, stable house prices, attractive rental yields and declining inventories is a powerful cocktail which would support consumer confidence.

Nevertheless, caveats remain, with a significant number of mortgage holders still in negative equity with neither the ability to refinance nor move to a new house. This is evidenced by the US Federal Reserve targeting its latest quantitative easing programme at the residential mortgage-backed securities market.

Barings also believes the increasing availability of US natural gas could have highly positive repercussions on the US economy. Historically low prices, coupled with the fact that the country has over 75 years of recoverable gas reserves, should benefit manufacturing.

Barings warns, however, that while repercussions for the economy are significant, there is currently a lack of political focus, with many interest groups showing a preference for clean renewables instead of natural gas.

Valensise continues: “The underlying conditions in the US are good, in fact better – considerably better, than any other major developed economy. The banking sector is recovering and is moderately expanding lending, also the consumer is generally more confident and the housing market has stabilized.

“US pension funds currently hold an average of 5% in emerging market equities and 2% in emerging market bonds. Given emerging market assets currently represent around 20% of global investible assets and emerging market economies make up approximately 36% of global GDP, we should see significant future flows from US pension funds into emerging market equities and emerging debt.

“Emerging market assets should represent a significant percentage of an investment portfolio. “We would complement this exposure with a position in Agricultural stocks, an asset class which should be doing well given the increased unpredictability of the weather and given the demographic trends.”

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