Commodity inflation, emerging markets, China, and the pace of the U.S. recovery certainly seem to be the macro investing themes everyone is talking about.
In a note published last month, Sarasin Asset Management (£9.8 billion Sarasin Partner’s asset management arm) gives an interesting analysis of the political climate as it relates to economic policy in the U.S. and explains the reasons why it’s bearish on China, bullish on the U.S., and wary of emerging markets.
Without further ado, here are some of their thoughts on what’s going on in the macro world and how it’s affecting their investment strategies.
Investors expect interest rates to rise and soon there will be a faster US economy.
- QE is finally working
- Employment and housing are expected to kick into gear this year
- Growth momentum picked up in the 4th quarter and that will continue well into 2011
Liquidity will become more controversial.
- Resistance to loose economic policies is on the rise
- Richard Fisher and Charles Plossner (huge critics of QEII) are now on the FOMC and will continue to resist Bernanke’s unorthodox policies. So will Jeffrey Lacker.
- In the UK, the MPC could be forced to prematurely rase interest rates. The likely ECB leadership change in October will be accompanied by tighter liquidity provisions.
In the EU, there is a light at the end of the tunnel.
- It may be a few weeks away from ground-breaking agreements, which the recently-created European Financial Stability Facility may have something significant to do with.
Emerging Market growth will become less attractive (relatively).
- As the U.S. economy revs back up, the EM-G7 growth gap is set to shrink
- EM demand is likely to shift from domestically-driven to export-oriented
- Eventually, faster US growth and the promise of tighter liquidity should reduce capital flows to EM
Strategies (we’re not going to reveal them exactly, but here’s an idea):
- Sarasin likes the combination of core European “balance sheet commitment” and enhanced yield.
- It thinks there’s a risk of regional sell-offs in EM. However EM currencies will continue to appreciate.
- It’s concerned about the abnormally high (45% of GDP) fixed asset investment in China because the pace is unsustainable. Commodity inflation is a concern.
- If U.S. growth surprises it could give support to Japanese equities.
- There’s room for earnings growth in the S&P.