OBSR’s Andy Brunner’s latest asset outlook

Equities are under pressure from short-term factors, but should be buoyed in the medium-term by factors such as above trend global economic growth, says OBSR in its latest monthly Global Investment Strategy note authored by Andy Brunner.

US equities will suffer from concerns over the outlook for growth there in the short term. But monetary policy, along with continued strong global economic growth and strong corporate profits should allay fears over time.

For emerging market equities the key danger is inflation, although this could ease in the second half of 2011, the report suggests.

“Investors should favour good value, growth stocks, and high yielders with strong balance sheets and companies with exposure to growth markets. From today’s levels, gains over the rest of the year should still outpace those from most other asset classes but an ability to withstand volatility is essential and ‘tail risk’ hedging is strongly recommended in today’s more uncertain investment climate,” the report’s author Andy Brunner wrote.

Over in bond territory, Brunner suggests that the widening of yields on 10-year US Treasuries recently should not be taken for granted. Corporate bonds are seen as better value and should outperform government bonds, he writes, but should be seen as income providers rather than instruments of capital gain.

“Riskier credits in the UK offer the potential for higher returns, with some further narrowing in spreads expected, but those in the US are now more fully valued and will widen should growth concerns persist.”

Property in the UK is suffering from the amount of money chasing available buildings. This has pushed up capital values. Yields are another story, although they remain above 10-year gilts. The ongoing recovery in property is also heavily dependent on location; central London remains the favoured location in the UK.

OBSR prefers property stocks to direct property.

Predicting commodity returns remains difficult. A slowdown in industrial output will hit industrial metals prices, but global economic uncertainty could boost gold.

Energy looks set to rise in the medium term, but oil prices could slip in the short term because of a build-up in stocks and a possible increase in OPEC output.

What is more certain is that speculation will continue to hit commodities.

“From a long-term perspective, this is probably a one-way, albeit volatile, bet as continuing strong growth in the emerging world and rising living standards will ensure this limited supply of resources such as energy, metals and crops will be under pressure from secular growth in global demand.”

Currency volatility could impact on all of these projected outcomes, however; Brunner says that European investors buying gold a year ago for €1,040 per oz would see a price of €1,050 per oz today. This is because although the price of gold has risen, so has the euro against the dollar, from 1.20 to 1.50 over the past year.

If interest rate differentials are driving the currency values, then the outlook for sluggish US economic growth suggests the dollar is not about to start appreciating against the euro anytime soon, unless the ECB reverses its tightening policy.

“The Emerging Market/commodity currencies remain the preferred choice on a long-term view,” Brunner notes.

 

 

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