Resource Search

The effect of high oil prices on the financial markets is not clear, as there is evidence to support both a benign and more worrying view. In general, investors will start to discount a worse economic environment if we sustain significant future price increases, but the current level of global oil prices should not be a deal-killer for growth or risk taking.

Equity valuations are at historically cheap levels given slowly recovering growth in developed markets, robust emerging market demand, global monetary easing, and signs of an improvement in corporate earnings prospects. We believe that this interesting combination of circumstances will underpin continuing buoyancy in equity markets, particularly in Europe.

The economic outlook has become slightly more mixed, especially in regard to the manufacturing sector and consumer spending after adjustments for inflation. Driving these inflation statistics and market anxieties higher were oil prices, and with the average price of gasoline in the U.S. nearing $4 per gallon once again, real questions have emerged about their potential impact on global economic growth.

Upon reflection of many meetings and conversations with economists, investment managers, and officials in Asia, three broad investment themes came out loud and clear: global growth is likely to continue to be muted; this will create some challenges for emerging countries; and Asia will therefore have to consider trade-offs with respect to their economies and politics.

If the current growth trend in bank credit continues, a failure on the part of the FOMC to raise its federal funds rate target and shrink its balance sheet will sow the seeds of a rate of consumer inflation above the FOMC’s 2% annualized target in 2014 and 2015.

Fiscal imbalances, monetary imbalances, and trade imbalances are serious issues that will continue to impact the relative value of the U.S. dollar, and none of these situ­ations is easily solved. The concerns they raise should be given deep consideration by dollar-based investors moving forward.

hat a difference a new year makes. Fueled by massive liquidity injection from the European Central Bank (ECB) and expectations of additional easing from central banks around the globe, stocks raced out of the starting gate and left bearish sentiment in the dust.

Although a multitude of risks remain, including the unresolved situation in Europe, geopolitical risks from Iran, and fiscal austerity in developed nations around the globe, markets are enjoying the moment, allowing risk assets to flourish and volatility, at least as measured by the VIX index, to retrench to a seven-month low.

The world continues to ride the same train of global imbalances. While short-term solutions have allowed us to arrive at the next station, few are attempting to address the long-term issues. We believe that capital markets will continue to assail the weakest links in the financial system, which, hopefully, instills the required discipline for policymakers to make needed, but difficult, decisions. Unfortunately for long-term investors, this suggests that we will continue to encounter a series of market crises, leading to continued market volatility that can test investor resolve.

As we briefly review 2011, one thing is apparent: corporations generally had a better year than politicians, job seekers or investors. Despite 2011’s economic volatility, companies delivered better earnings than the consensus had forecast last January. Yet despite solid corporate profitability, macro uncertainties kept stocks under pressure for most of the year and ignited a simultaneous flight to the safety of U.S. Treasuries. With 2012 being an election year, we can expect to see even more sparring in Washington, D.C.