ING IM believes that the headwinds of late will ultimately blow over with market anomalies set to find equilibrium over time. Looking at the common denominators of market movements in the past, the Chief Investment Officer has identified two different forces. Monetary policy easing has been instrumental in inducing an upturn. Downturns have been mostly the result of a combination of increases in political risk or policy mistakes and idiosyncratic shocks.
Hans Stoter, Chief Investment Officer, ING IM International said: “We seem to be dealing with a set of persistent tailwinds, while the headwinds seem to be short-lived, now that central banks have reduced the systemic risk.
“The three biggest central banks, each in their own way, did what had to be done. Their actions are an important tailwind and a major driver for the improvement in global economic growth. Until recently, Japan remained the laggard with no real change in its policy since 1990. However, the determined effort to finally overcome deflation will further boost both Japan and the world. Thus once more, the most important tailwind is a change in monetary policy, in this case in Japan.”
ING IM foresees that Japan’s monetary policy will boost domestic demand while the weakening yen, caused by the new policy, will also boost exports. The investment manager states that the effects of this new regime will remain more at a regional level at first, but global liquidity growth, final demand and global economic growth will also benefit from this new stance.
On the other side of the globe, ING IM highlights the United States is showing promising data, with both supporting economic data and earnings dynamics. The US housing and labour markets are clearly improving and this data is further amplified by the expected increase in corporate spending. This is already visible in the service sector activity that is picking up. For now, ING IM sees no signs of a tightening policy from the Fed to temper the growth in the US market and while there is fiscal tightening, the effect remains small.
Hans Stoter continues: “The contrast between the tailwinds of Japan and the US and headwind coming out of Europe is rather large. The decision of the ECB not to change their policy jogged many investors’ memory of the way Japan used to operate, before the current leadership. At the same time complacency amongst European policy makers reminded investors of the gridlock in the US.
“However, evidence of the lack of power of these headwinds is also visible in the European market. The market reaction to the Italian elections for example and especially the Cyprus crisis has been remarkably subdued. This can be seen as an indication of the effectiveness of the liquidity mechanisms in substantially reducing the transmission of political uncertainty towards financial markets.”
Turning towards the emerging markets, ING IM observes weakening macroeconomic fundamentals and a reduction in competitiveness yet notes that the tailwinds still outweigh the headwinds. If markets continue to anticipate more monetary easing globally, the investment manager predicts that flows to higher yielding assets -such as EMD- are likely to strengthen again, despite the deteriorating prospect for economic growth.
Hans Stoter concludes: “Investors have to deal with these regional differences and search within assets classes to find their optimal combination of relative safety, income and capital appreciation potential. In equities we can find income in high dividend. We believe that dividends are relatively safe even in a low (earnings) growth environment. In the current environment for fixed income, high yield bonds provide much appreciated income with relatively low volatility. Investors that aim for capital appreciation should allocate to equities, but with that they will have to accept the larger volatility of this asset class.”
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