The Global Portfolio Strategies Group recently released its second-quarter 2012 economic outlook. A summary of its conclusions is provided below:
We continue to favor U.S. equities over international, especially Europe. The recent European Union agreement, while a step forward, is not a game changer in our view. In contrast, the U.S. economy and financial system remain in fairly decent shape, U.S. equity valuations have declined from their recent peak, and a modestly expanding economy and moderate earnings growth bode well for a continuation of the cyclical bull market.
The U.K. economy has felt the full force of the slumping eurozone, coming on top of domestic fiscal austerity. The government recently committed itself to additional liquidity injections and a targeted fiscal stimulus. Fortunately, inflation is finally ebbing from the stubbornly high rates of last year, providing the needed flexibility to respond more forcefully to the slowdown.
Emerging markets have gone through a soft patch, partially owing to a triple dose of trouble, including falling trade with Europe, falling trade among emerging countries, and tighter trade credit as stressed commercial banks cut back their lending exposures. The sharp currency depreciation experienced by many emerging countries, combined with aggressive monetary policy actions, should provide a boost to these economies in the months ahead.
Emerging market investors have faced harsh challenges during the past quarter, grappling with slowing growth and severe declines in local currencies. Emerging market equities are starting to look cheap on the basis of earnings, cash flow and dividend yields. When the “risk-on” trade comes back into vogue, we think emerging market equity could be a major beneficiary.
As in recent summers, the investing environment has turned challenging. Market participants face a raft of uncertainties. Will the favorable market response to the latest European agreement last any longer than prior ones? How serious is the U.S. soft patch? Who will be elected in November? Will Congress jump off the fiscal cliff at the beginning of 2013? Not only is it hard to guess the answers to these questions, but it is just as hard to gauge the reaction of the markets. In this environment, we expect markets to remain choppy and news-driven going into the November elections.
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stock market in general. The S&P 500 is often used as a benchmark for equity fund performance.
differences in generally accepted accounting principles or from economic or political instability in other nations.
Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume.