09/02/2011
By Ilonka Oudenampsen
Industrial data over the past few weeks have been unequivocally strong in the US, Northern Europe and Japan, according to Baring Asset Management.
While there are still a few weak patches, Barings believes these are products of severe weather over the period, such as UK Q4 GDP figures and the latest US non-farm payrolls. However, the fund manager warned there are threats on the horizon with more signs of inflation among the “usual suspects” like the UK and China, and it also expects higher inflation figures in the US, Latin America and Eastern Europe.
Percival Stanion, head of asset allocation at Barings, warned of a growing chance of political risk in Europe but in recent weeks the world’s attention has been gripped by developments in Egypt. He explained: “Although less important than Europe economically, Egypt is a key bell weather state in the Middle East and political developments there could bring instability to the main oil producing states. At the moment most of these have the resources to buy off discontent, but the oil price push through $100 per barrel is a sign of the market’s nervousness.”
He added: “Meanwhile, the fear of contagion across Europe, spreading to Portugal, Spain and even Belgium has receded a little amid signs that Germany may be willing to back some improvements in the bailout fund, the European Financial Stability Fund.”
In emerging markets, Barings said that there are increasing signs that governments are taking firmer action against the inflationary threat. Stanion said: “China has now moved away from an overtly easy policy and has raised rates and tightened bank reserve requirements over recent weeks. There is likely to be more tightening in the pipeline which, while dampening activity in the short term, does make the long term secular argument sounder. India, Thailand and South Korea are also moving to tighten policy.”
In terms of asset prices Barings believes that many markets had become somewhat overbought in the sharp rallies up to the year end. Subsequently the fund manager has seen some profit taking and a degree of rotation between sectors and markets. Peripheral European markets like Spain have bounced sharply and small caps have surged, while mining stocks have given ground.
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