Opportunities in corporate bonds and high dividend yields
The future of the euro remains centre stage and this will continue to dominate the economic agenda in 2012, synchronised unfortunately with the multi-year theme of reducing debt levels across both the US and the UK.
“Periphery euro-zone countries remain uncompetitive. With these economies now refinancing debt at well over 6% and with no growth, it is clear that debt numbers will continue to compound,” said Gayle Schumacher, Head of Investment Office, Coutts. “Against this fierce austerity backdrop, we are guaranteed a rocky first quarter as European politicians ask the electorate to approve plans for fiscal union.”
Over the next 12 months, with high inflation and low interest rates continuing, Coutts predicts that the search for income will be one of the most important goals for investors. Corporate bonds, emerging-market debt and gold will be better placed than global government bonds to deliver absolute positive returns. Overall, equities are likely to generate better returns compared to fixed income. Investing in high yielding equities will help investors to moderate market volatility, as well as provide income. UK commercial property, in particular the Central London office market, will provide attractive returns in a low-yield environment.
Investment themes highlighted in the Coutts Global Market Update are:
Long-term strategies are required for equities. With low returns on cash, investors will need to take a longer-term horizon to preserve the value of money through investing.
Alan Higgins, Chief Investment Officer UK, Coutts, believes: “In order to take advantage of current low valuations in equity markets, history suggests that an eight-year time horizon is required. For investors who can afford to take equity risk, drip feeding money into markets over the coming months will make sense over the longer term.”
Asian economies will slow in 2012. Weak growth in Europe, a key trading partner for Asia, will be a key driver for slowing momentum, along with the lagged impact of 2011’s domestic policy tightening.
“We expect Asian policy-makers to address some of the problems stemming from Europe, which includes bank lending to businesses, with a continuation of easing fiscal and monetary policies,” said Norman Villamin, Chief Investment Officer Asia, Coutts. “We don’t expect further interest rate cuts in the early part of 2012, but real interest rates are expected to stay low.”
Stay with gold for commodities exposure. Gold is not immune to market volatility, but drivers such as the growth of central bank reserves and negative real yields from interest rates provide a positive outlook for the asset class. Gold is looking more attractive than other commodities as it is less likely to be affected by the lack of global growth.
The bond market in Asia is attractive given the strength of corporate balance sheets and continued, albeit slowing, growth should ensure that credit quality remains high.
Asian currencies will be a key long-term driver to global rebalancing. We expect the Chinese Yuan to take the lead, with appreciation of around 4-6% annually over the next three years, and for other currencies around the region to broadly track this.
The Global Market Update is in audio format and can be accessed at: http://www.coutts.com/global-update