Current perspective...

Perhaps before we start to blog, we ought to preface this with our current perspective on the markets.

We are on balance optimistic about the global economic recovery. We feel the current problems related to the European sovereign debt crisis will have a negative impact on the global economy but the recovery will remain intact.

Following from that, we remain positive on equities vs. bonds over the next year or so. And within equities, our preference is to stay constructive in Emerging Asia notwithstanding the enormous balancing act these economies have to perform to contain pockets of inflation and asset bubbles amidst a global rout caused by the sovereign debt crisis.

It remains to be seen if Greece and its political leaders will have the fortitude to continue implementing such severe austerity plans. The massive EUR750 bn package has bought it time. But the risk of a restructuring sometime down the road cannot be dismissed. Meanwhile, we expect the EU will have a mechanism to prevent such a scenario from happening again and this mechanism may also see some members voluntarily exiting the zone – more for political expediency rather than for economic reasons. Meanwhile, the EUR will remain structurally weak.

In the EM, especially Asia, central banks will have to start normalising rates sooner rather than later. The current debt crisis was a perfect excuse for some countries to hold off rate hikes. There was a genuine concern on the implications of the debt crisis on growth. But the real issue is the impact of more capital flows arising from higher rates, which the authorities have difficulty sterilising. China seems to be mulling some form of capital controls before actually moving on rates. Ultimately, I expect these economies to use a combination of policy rates, currency appreciation and administrative measures to tackle their problems. From a currency perspective, it continues to make sense to overweight a basket of emerging currencies against the G3 over the medium term, even if the USD remains king in the short term.

And finally for those concerned that we have not seen the end of the sovereign debt problems and that at some stage, the markets will frown upon Japan’s and America’s situation, Gold remains one of the better hedges against a debasement of paper currencies.