Report

Ecouter 

by Readspeaker

Paris, 28^th Oct. 2009

An extract of the September 2009 edition of Investment Strategy:

Economic policy is still critical
The consensus is now well established and has been confirmed by central banks, national governments and international institutions: we have seen the worst of the recession. We believe the recovery will continue, mainly because public institutions know very well that further monetary and fiscal stimulus might be necessary to get ailing economies back on their feet.

Questions for 2010
But beyond the cyclical rebound, which until now has seen a stream of good news that has been fuelling an equity market rally since March, the developed economies are likely to experience a period of sluggish growth due to high unemployment, which in the OECD countries could rise from 8.5% in July to almost 10% in 2010. With the labour market this weak, national governments will probably extend their exceptional measures to support economic activity and postpone the return to fiscal discipline until 2011. Public officials believe that the recovery is still fragile, and they are right.
Although the return of financial conditions toward normalcy has helped revive investor appetite for the riskier asset classes, concerns as to how central banks will exit their accommodative monetary policies could increase the volatility of short and long-term yields, and consequently that of other assets as well. The Federal Reserve's efforts to bring a smooth end to its asset purchase programme reflect not only its desire to prevent imbalances in financial markets but also its fear that the progress that has been so difficult to achieve might suddenly be compromised. We believe that central banks will do their best to exit from their exceptional policy measures and extremely low interest rates. However, we are likely to see more concern about economic growth and the normalisation of monetary policy in 2010.

Near-term dynamics still relatively favourable
But even though the concerns mentioned above have already raised their heads, the favourable dynamics in economic conditions (restocking and the manufacturing recovery) and in the outlook for corporate earnings should continue to support the riskier asset classes for the rest of this year.
Even though equity markets have made impressive gains since hitting bottom in March (the MSCI World was up 66% on October 6), institutional investors are still underexposed. This situation offers additional upside potential that continues to justify an overweight position in equities, although there will certainly be some ups and downs along the way.

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