GLOBAL - While City pundits look to blame a possible war with Iraq for stockmarket turbulence, one leading chief investment officer believes that any conflict is clouding the deeper problems facing investors and the financial services industry.
According to Robert Talbut, CIO of ISIS Asset Management, one of the UK’s largest fund management companies, the current equity market is shaping up to be the worst ever, with US equities needing an estimated 7% per annum rise and German equities 13% between now and 2009 to ensure that levels stay above those of the 1930s.
While most investors are anxiously awaiting the outcome of a potential conflict, Talbut believes that any post-war rally will only skim the surface of stock market problems. From a financial perspective, “Iraq is something of a red herring”.
“There may be some modest stock market rally on any resolution of the conflict,” he said.
“But investors are currently faced with two more fundamental issues: a shake-up in the established world order and persistent economic softness. “
Talbut points to the current state of disunity within the global community.
“From a market or investor perspective the important point is that the world is perceived as a ‘riskier’, or at least a less certain, place. Therefore equities need to be priced cheaper in order to compensate, and government bonds can trade more expensively.”
The second issue is that of relatively poor economic performance, compounded by a lack of corporate pricing power, a general reluctance to invest and “uninspiring” reductions in interest rates.
ISIS’s economic outlook over the next 6-12 months is flat.
“Our hope is that the authorities do not take the Japanese route, where after 12 years of grind the economic outlook is still one of contraction and disappointment. The US Federal Reserve has spoken of more ‘unconventional’ monetary measures, and we expect this to come onto the agenda sooner rather than later.”
Despite the doom and gloom, Talbut believes that the current equity market is providing investors with rare investment opportunities.
Isis is particularly bullish on UK equities, but urges investors to diversify their portfolios with substantial holdings in other asset classes such as corporate bonds. Similarly credit strategies, private equity and possibly commercial property are also expected to give equities a run for their money.
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