Prolonged low rates challenge investors
LONDON—CENTRAL banks in Europe, the UK and Asia may signal a prolonged period of low rates this week after unleashing a wave of liquidity to prevent a sharp slowdown in the global economy, driving investors to search for value in stocks and commodities. US payrolls data at the end of the week and factory output numbers from across the euro zone, the UK and China will tell the story of how successful the central banks have been.
Many analysts think a modest global recovery is now under way, but with plenty of risks to this outlook still around.
“Growth is likely to be very sluggish,” Mouhammed Choukeir, the chief investment officer at British private bank Kleinwort Benson said, “so central banks are very conscious of taking the punchbowl away from the party at this stage.”
US Federal Reserve chairman Ben Bernanke set the tone in remarks to lawmakers last week, calling the recovery in the world’s biggest economy moderate with unacceptably high unemployment, but avoided any talk of further easing measures.
Last Thursday, the European Central Bank, the Bank of England and the central banks of Canada, New Zealand, South Korea and Indonesia all hold policy-setting meetings. Australia’s central bank meets on Tuesday.
In Europe, manufacturing activity indicators have pointed to a modest recession across the euro area, while in Asia new factory orders have perked up leaving it as the one, albeit spluttering, engine of global growth.
The big US data for the week—non-farm payrolls for February, due on March 9—are expected to show the economy added around 210,000 jobs, compared with an expansion of 243,000 in January.
For investors, the prospect of a long period of low interest rates, sovereign debt problems in Europe and possibly rising oil prices that push up inflation and cut consumer demand, presents a tough set of challenges.
Fund managers are zeroing in on value and yield and finding it first and foremost in emerging markets, but also in the corporate sectors of some developed economies. “We fo- cus on really attractive value and that we find in the UK right now versus the US” said Kleinwort’s Choukeir, who cited the lower price/earnings ratios for UK equities versus US stocks and their higher dividend yields.
Globally, investors boosted their equity holdings to an 11-month high in February while slashing bond and cash allocations as monetary easing from major central banks, especially from the euro zone, eased risk fears.
Richard Batty, global investment strategist at Standard Life Investments, said that after the European Central Bank’s massive liquidity injection into the banking system he was still cautious on the region’s equity markets and preferred the United States.
“We’ve had a liquidity boost in Europe and the risk premium on many assets like the euro and European equities has come in. “Now the question going forward is where are you going to get the strongest profits. We think globally you’ll get 5 to 6 percent profits growth this year but in Europe it will probably be negative.”
Standard Life Investments, which has around 150 billion pounds ($239.38 billion) under management, currently has a heavy weight position in corporate debt, both high grade and high yield, in addition to US stocks.
Emerging markets have been a big winner this year, with the MSCI Emerging Equities index up 16.8 percent in the first two months of 2012, but this comes after the index fell by 20 percent last year.
By comparison world stocks, measured by MSCI, are up around 11 percent since the start of the year, after a volatile 2011 where it lost more than 9 percent.
Investors in emerging markets face two big events in the coming week.
China’s National People’s Congress convenes on Monday to hear the government’s plans for 2012, which will include new targets for growth and inflation as well as fiscal policy.
In Russia, investors are betting that Vladimir Putin will return to the presidency in weekend elections and that the result will be accepted by the people.