by Gabriel Lacroix | Thursday, 24 September 2009
With growth asset classes highly correlated, and returns on cash and bonds creating a portfolio drag, diversification opportunities are scarce but possible, according to investment strategist, Norman Stacey.
Mixed and lagging economic data, worries of relapse and dithering cash rich investors are supporting monetary and fiscal stimulus remaining in place, aiding the global economic recovery, Stacey writes in his latest Diversified View.
He believes the economic turnaround is likely to exceed consensus expectations and official estimates will be sequentially revised upward as the recovery unfolds. But, he cautions, there are still risks to the global economic outlook.
In his view, a precipitous withdrawal of either monetary or fiscal stimuli, exogenous factors such as natural disasters and terrorism, and the possibility that “the world does indeed descend into another down-leg, heedless of, and perhaps exhausting, official stimuli” are some risks to the global economic outlook.
But at a global level, Stacey thinks that stronger than consensus growth ahead is of sufficient probability to warrant a bias to growth asset settings – but “always within a systematically diversified portfolio”.
He is not upbeat on the recovery of the New Zealand economy.
“New Zealand lags in both the market rebound and economic resurgence stakes. We continue to be beset by low-growth policies and big government, while the soaring dollar retards recovery in the export sector,” he writes.
“NZ economic outlook is mediocre; gently rising inflation despite modest growth, to be damped by rising interest rates ahead,” he adds.
On fixed interest, he said that despite good capital gains, the fixed interest asset class is unattractive. “Yields are generally now low in absolute terms and by historic comparison, while risks may be mounting,” he warns. He has adjusted Diversified’s model portfolio to minimal allocations supplemented with other sources of income such as gold.
Equities have again fulfilled their traditional role as harbingers of economic turnaround, Stacey writes. He predicts the possibility of a “melt up” in the equities asset classes. “Nervous cash, still on the sidelines, stands to cause another leg up, when eventually re-commits,” he argues, adding that he favours a “fully invested stance to equities, trimming profits at the margin from the most high-growth areas, and bolstering selected developed markets with the proceeds.”
But the future is never ‘knowable’, he warns.
“Currencies, Corporate Bonds, Equities and Commodities are all highly correlated at present, while returns on Cash and Sovereign Bonds are a portfolio drag. In this context, Diversified continues to advocate an elevated allocation to Gold – for scarce diversification as much as its intrinsic value,” he concludes.
© 2009 financialalert, Brillient Investment Publishing Pty Ltd ABN 19 122 531 337.
