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Asia
Whilst it is impossible to time the recovery we do see some signs of
encouragement as the US economy is beginning to raise its game and
exports remain strong. The emerging markets will eventually reflect
this recovery and South East Asia continues to perform relatively well
with Indonesia, Thailand and Malaysia outperforming on strong
corporate earnings.
The key component to the region remains China. Due to its size and
importance in the overall development of Asian and emerging markets,
China remains at the centre of people's attention. We continue to believe
that whilst its problems are increasing, it still has the tools to achieve a
managed slowdown. It is likely that the authorities in China will continue
to bear down on the property market. Any gentle loosening, perhaps later
this year, would be welcomed, but a more aggressive approach would
not be taken well by the market. A smooth leadership transition (at least
outwardly) should be expected, but it is equally as important that China
continues to rebalance its economy. This, together with the continued
problems in Europe, will not make policy making easy for the developed
Asian markets.
Japan
The Japanese Yen was depreciating at the start of 2011 as risk assets
performed well but the Japanese earthquake and tsunami marked the start
of a continued appreciation of the Yen for the remainder of 2011. Despite
attempts by the Bank of Japan to push the currency lower, intervention only
led to short term respite.
The key policy for Japan in 2012 is getting the economy back to normal
and the year ahead is likely to be a tug-of-war between US recovery,
European recession and a Chinese slowdown. Although the growth
outlook is uncertain, investors’ expectations are fairly low and even
tentative signs of improvement elsewhere could lead to decent returns from
the Japanese market.
At a micro level, Japanese companies still trade at reasonable valuations
and a modest improvement in earnings expectations could lead to an
optimistic outlook for Japan later this year.
ASIA AND JAPAN
The majority of markets performed poorly during 2011 falling by 18% in
US dollar terms – almost double that of developed markets. Much of this
was caused by uncertainty in Europe as western economies continue to
struggle with deficit reduction, but they were also affected by their own
struggles to tighten liquidity. Despite growing domestic markets, problems
in the West have a knock-on effect, as many of the countries rely on the
West, as well as on continued demand from within the region.
The short-term environment for these markets remains challenging. They
will continue to react to news on the European debt crisis and a recession
in Europe means that sentiment in emerging markets stays muted. In
addition, there are other events within the region that are still to unfold,
most notably how China manages to control its desired slowdown.
However despite these more immediate concerns the longer term
investment case for these markets remains strong.
Frontier Markets remain volatile and the ongoing events of the ‘Arab
Spring’ call for extreme caution on any investment. These markets remain
EMERGING AND FRONTIER MARKETS
So much has been said about Europe and much remains to be resolved,
so there is little we can add here. Overall, the policy responses from
Europe in answer to liquidity concerns and government debt were largely
disappointing. As a result the markets gave up hope.
Europe has taken a step nearer to fiscal union with an agreement on fiscal
rules to balance budgets and there were other measures to increase the
resources of the bail-out fund.However watching the painful proceedings
of European politicians playing to their electorates provided little comfort
to investors.
We expect to see increased willingness (primarily an acceptance from
Germany) to allow for a more aggressive European Central Bank (ECB) if
recession deepens in 2012. We believe that the idea Central Bankers
may be taking more direct action is good news. Accordingly we would
not be surprised if the ECB began to implement Quantitative Easing in the
first half of the year so that it can absorb more sovereign debt.
TOTAL RETURN 2 YEARS
MSCI EMERGING MARKETS USD & MSCI FRONTIER MARKETS
USD TOTAL RETURN 2 YEARS
FTSE Greece TR GBP: -77.49 FTSE Europe ex UK TR GBP: -9.81 FTSE Germany TR GBP: -6.76 FTSE MIB TR: -33.8
FTSE Spain TR GBP: -25.5
MSCI AC World TR GBP: 50.65 Topix TR: 16.36
MSCI EM (Emerging Markets) TR USD: 1.35 MSCI Frontier Markets TR USD: 5.36
in their infancy and whilst countries such as Venezuela are buoyed b
the prospects of elections, Hungary, for example, looks set to ask the IM
for assistance.
FTSE ASEAN 40 TR GBP MSCI China 10-40 TR GBP MSCI Taiwan TR
MSCI WORLD GBP & TOPIX TOTAL RETURN
2 YEARS
FTSE ASEAN 40 & MSCI CHINA & TAIWAN
GBP TOTAL RETURN 2 YEARS