Balance in an Unbalanced World

Opportunities abound amidst global imbalances.

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balance coin stackEurope’s financial troubles have turned the issues of debt, GDP growth and interest rates into regular buzzwords in the mainstream news. While debt-to-GDP levels in the developed world are still high, and many global economic concerns remain, there are stories behind the headlines that merit attention when viewing the markets as a professional investor. Firstly, by many measures the balance sheets of the European Central Bank and Bank of Japan are healthier than those of their counterparts, the U.S. Federal Reserve and Bank of England.

Also, while concerns persist about a potential hard or soft landing for the Chinese economy, several factors give cause for optimism. China’s near-term real GDP growth for 2012 is projected to be at or higher than a 7.5% target level, the country’s economy has become significantly less dependent on exports than it was even three years ago and infrastructure spending is expected to remain a source for internal economic growth for many more years.

Today’s fundamental and perceived economic realities create an environment where particular investment opportunities have emerged. Developed-market government bonds overall are at record-low yields, which has had a partial role in creating a risk premium for investors who are willing to take on equity investments. So while there are potential rewards for investing in equities at this point in time, are they worth the risk? Historical data over the past 30-plus years show that over time, market conditions have favoured equity investments, and that over the long term the volatility of such investments decreases considerably.

Portfolio diversification has become more complex in recent years, requiring investment professionals to extend their scope beyond the just balancing stock and bond exposure. Within the equity arena, different developed markets perform in considerably different ways, with no market consistently the world leader. The same is true in the global fixed income universe as well.

When searching the world for the best opportunities for investors and plan members, it can be advantageous to have a partner with local, proven expertise in all the major markets of the world, with the ability to deliver both equity and fixed income solutions to help ensure true diversification.

Samer Habl is Managing Director, Tactical Allocation Research with Franklin Templeton.


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