Views

2011 looks like being yet another challenging
year for investors. Persistent currency­
related tensions underscore how important it
will be to proactively manage currency positions
in the months ahead. Countries’ conscious
efforts to «achieve» a weaker currency – a byproduct
of China’s growing share of global
production – are beginning to bite. The competitive
devaluation of currencies, pointedly referred
to by some as a «currency war», is keeping
a strong element of tension in a global econ ­
omy that can barely be said to have stabilized.
Owing to its limited sphere of political influence,
Japan is destined to lose this war. Preference
must clearly be given to the other Asian stock
markets. Volatility between the US dollar and
the euro on the one hand and between the euro
and the Swiss franc on the other indicate upside
potential for these currencies. At the same time,
governments that see themselves at a competitive
disadvantage relative to the yuan, which is
tied to the US dollar, could cause problems by
intervening. Following the huge flight of capital
to emerging markets over the past twelve
months, Korea and even Brazil, for example, are
weighing up the option of capital controls to
prevent foreign investment capital from pumping
up bubbles on their markets.
US economic growth will remain below
par in 2011. Though construction and consumption
are the traditional drivers of economic
recovery, that could prove a tall order this time
around. Given the prevalence of excess supply,
the Fed’s attempts to stimulate the construction
industry with cheap long­term interest rates and
bond purchases have little prospect of success.
Now that the quantitative easing of US monetary
policy has been announced, inflation will
take on fresh significance in some countries. In
the emerging markets, basic and raw materials
account for a sizeable chunk of the basket of
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goods that is used to measure inflation. A further
dollar­driven rise in the prices of commodities
could thus fuel inflation in emerging countries
and lead to further hikes in interest rates, especially
in China. In the USA itself, below­average
wage growth is keeping consumer price inflation
down to around 1%. Inflation and the likely inflationary
trend in 2011 will also remain below
average in the core European markets and in
Switzerland. The relatively mild threat of rising
interest rates in Western countries and Japan
means that, for the time being, there is little need
for a correction in the bond segment. Either way,
the focus initially remains on quantitative easing,
i.e. the extent to which the purchase of US
Treasury bonds leads to cuts in long­term interest
rates. The possibility of higher base rates in
the emerging markets could put long­term rates
in these countries into stalemate, with lower US
rates at the long end helping while higher shortterm
interest rates in the emerging markets represent
a hindrance. In 2011, investors will there ­
fore once again prefer investment grade corporate
bonds to government bonds, while selectively
adding emerging market bonds to the mix.
Europe’s economy has so far stood up
well to the USA. Its stable health is attributable
to a relatively high proportion of exports
(especially in Germany), buoyed primarily by
emerging markets’ demand for capital goods
and autos. The divide in the European economy
– between the «hard core» of countries centered
around Germany and the «soft» peripheral nations
that are plagued by heavy debt and refinancing
worries – looks set to continue. The
euro remains fairly strong and still appears to
be generally ignoring the persistent uncertainty
surrounding government debt and budget deficits
in the peripheral countries, above all in Portugal
and Greece. These countries’ bonds have
nevertheless resumed their downtrend against
harder currencies, particularly the Swiss franc.
The euro thus remains exposed to risks, even if
quanti tative easing has now put pressure on the
US dollar, as the latter’s interest rate differential
relative to German and Swiss bonds is now expected
to decline.
Stocks and shares will probably remain
volatile in 2011. Structural global imbalances
could cause tensions in the world’s financial system
to persist. Stocks will therefore continue to
fluctuate sharply within individual countries and
industries. The trend toward competitive devaluation
in different regions will continue, adding
to uncertainty about profit growth and keeping
alive the mid­term danger of protectionist intervention
and/or capital controls.
The bottom line is that a global disequilibrium
persists between countries with current
account surpluses (such as China) and those
that are still running deficits (such as the USA
and the peripheral European nations) – not to
mention the heavy debts that burden some of
the G7 countries. As in 2010, these influences will
do nothing to alleviate the strain on the global
financial system in 2011. Above­average volatility
(and risk) in major asset classes – mainly
stocks and currencies – is thus on the cards for
the next few quarters. Dynamic wealth management
will thus remain as important as ever for
private clients in 2011.
At the start of the new year, precedence
should be given to tech stocks that benefit from
the weak dollar and telecoms shares that benefit
from substantial dividends, for example.