Comments from Nick Gartside, International Chief Investment Officer for Global Fixed Income at J.P. Morgan Asset Management, on the impact of the Eurozone crisis on economic growth in 2012.
Does history repeat?
Strong stocks, encouraging economic data releases, geo-political tensions brushed off, piles of cash waiting to be invested. Sound familiar? Is Q1 2012 shaping up to look like Q1 2011?
In terms of economic performance our proprietary leading indicators continue to bounce back, particularly in the US where the six month change is now at zero, suggesting positive, if still sub trend economic growth rates. Cash levels are also high and seasonal factors do point to cash being invested early in the new year.
The elephant in the room? The Eurozone, of course. We've often described the issues in the Eurozone as like a (very) wobbly three legged stool with the legs being: sovereign stress, bank fragility and weak public finances. Arguably the stool is a little less wobbly, at least in the short term. The ECB is capping Italian and Spanish bond yields (at the moment) at 7% and the ECBs 3 yr LTRO has effectively financed banks for 2012 by replacing a lot of the maturing senior bank debt. Although the third leg, weak public finances, still looks shaky with the revision to the Spanish 2011 deficit to -8% from -6%. This last point does highlight that although the backdrop maybe less wobbly, significant structural issues remain to be resolved. Ultimately, this, coupled with the continued backdrop of bank deleveraging and fiscal austerity measures, is likely to keep economic growth subpar and government bond prices well supported.
Recent central bank actions have managed to create a slightly more stable environment and over the next few weeks it does look like risk assets have some breathing space and can perform well. Portfolios, with modest allocations to well researched investment grade, high yield and emerging market bonds are set up well for this environment.
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