Perspectivas de Inversión 2010 | Repaso Y Previsión Semestral

Executive Summary


With nearly the first half of the year behind us, it is time to revisit our investment perspectives for 2010. In January, we expressed the view that economic and financial market conditions would become increasingly complicated and challenging; five months later, this has clearly turned out to be the case and, in that respect at least, we have not been disappointed! Market participants have had to face extreme levels of stress within the European sovereign debt markets, interbank rates creeping higher, the return of volatility and erratic political decisions affecting the capital markets.


During the same period, companies have been busy reporting strong earnings for the first quarter of 2010 and issuing overall optimistic outlook statements for the following quarters. We wrote in January that it would be important for companies not only to be able to produce good results due to the implementation of cost-cutting measures and higher margins, but also to be able to generate top line growth. This has largely been the case and has proved to be supportive of higher equity prices during the reporting season of earnings.


At the time, we also highlighted the need to observe an improvement of the labour markets in order to feel more confident that the economic recovery could become self-sustainable. On this issue, there have been mixed signals and one has to note that the economic recovery has not created many new jobs so far. In the U.S. for example, even if the economy is no longer destroying jobs, companies have been more inclined to hire temporary workers rather than take on new employees and the recent nonfarm payrolls data underlined that fact. It appears most likely that the current economic recovery will only contribute to the creation of new permanent jobs at a moderate pace and that unemployment levels will remain elevated for a long period.


The positioning of our clients’ portfolios during the first quarter enabled us to generate strong performances, as credit spreads narrowed and equity markets appreciated, reflecting the growth of earnings. Since then, the portfolios have clearly been impacted by the correction of riskier assets, but still remain in positive territory at the time of writing.


The recent sell-off in risky assets seems to be pricing in an increasing probability of a double-dip recession scenario. We do not believe that the economy is heading for another period of recession, but the increasing level of uncertainty about systemic and cyclical risks has led us to tactically reduce the sensitivity of our clients’ portfolios to risk assets. At this stage, our view is that risk perceptions have taken precedence over earnings delivery, hence our beginning of May decision to reduce the allocation to global equities.


In the next section of the document, we will review the current economic conditions through five of the key economic indicators that we observe. This will be followed by a brief overview of what took place in the financial markets over the last six months, leading us to outline our outlook and recommended asset allocation for the second half of 2010.

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