Running the gauntlet in 2011
A number of the challenges of 2010 remain in place for 2011, not least the fact that the world has too much debt. Underlying economic conditions are disinflationary in the developed world, as governments impose austerity and higher tax demands on their populations.
Inflation comes into play in open economies with weak currencies, such as the UK, whereas the developing world may suffer sharp (if short), inflation as strong demand for raw materials coincides with short supply.
Economic growth in 2011 is likely to be low, as the developed world comes to terms with austerity; and inflationary pressures are constrained in the developing world by interest rate rises. Markets advanced strongly in the last six months of 2010, with a remarkable total return of 22 per cent from the FTSE All-Share Index and 19 per cent from overseas. Expectations should be tempered, however, by probable volatility of markets, as sentiment swings between confidence in continuing economic recovery and fears of further banking crises and recession.
Political risk has come into greater focus. Europe’s challenges have been recognised. Turmoil in the near east is now in the headlines and should not be dismissed lightly. Such events emphasise the need of the investor to ‘insure’ his portfolio by orientating it towards real assets: property and commodities, oil and gold in particular, whilst capturing the benefit of improving equity returns.
A tricky ride looks the likely journey in 2011 (as it looked in 2010); by staying the course, however, the investor is likely to make useful returns. The consensus suggests a combination of emerging markets (and large cap laggards with above-average yields) will provide the best returns. We would counsel caution on the first but back the second, with developed markets offering a decent return with lower risk. Investors should benefit also from the additional magic of an increase in merger and acquisition activity, thanks to the improvement in profitability (and the concentration of cash) within the corporate sector.
Author: Jamie Korner
Jamie Korner joined Newton in 1995 and is a director of the company, responsible for managing institutional and charitable funds.
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