Equities: Maintain Exposure
There are two main reasons to maintain exposure to equities despite the murky economic outlook. First, the corporate sector in many developed nations is in relatively good shape as a result of low debt levels and high productivity. Valuations are still reasonable. Second, there are few other good options for investors seeking decent returns. However, we continue to believe benchmark exposure should be less than in previous periods because of the continued high level of systemic risk.
Some Thoughts on Geographic Diversification
Valuations in most markets are close to long-term average levels (Charts 8 & 9). These conditions exist in much of Europe as well. We expect to see healthy gains in both European and North American markets over the next six to nine months, (Charts 10 &11). China, and broadly speaking other emerging markets, have different dynamics. Monetary policy will continue in a somewhat restrictive direction, but capital inflows and interest rates far below growth rates will ensure excess liquidity and a tendency for asset markets to be buoyant, in spite of valuations. Chinese equities, in particular, should perform well, given the 15-20% correction over the past year against a backdrop of continued strong growth (Charts 12 &13). The fear of a big China slowdown due to tightening of monetary policy is way overdone. A bit of moderation in China’s growth is a welcome development from overheated conditions and will not derail the North American recovery. However, it could soften some commodity markets further.
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