For super funds and their advisers

The big story, says DWS – how to cope with the downturn

They may look unstable at the moment, given the uncertainties in the developed versus the developing world, but emerging markets probably represent the best prospects for our future. The big “contrarian trades” at the moment are international versus US and value versus growth.

DWS (formerly known as Deutsche Asset Management) which has a long track record in emerging markets, last week presented its view on the outlook. Sean Taylor, the Hong Kong-based CIO for Asia Pacific and head of emerging markets, said at a briefing in Sydney, that while there would be a slowdown in global growth, there probably would probably not be a global recession.

“It’s actually been an incredibly good year so far, in the equities markets, after the fall-off we had at the end of last year,” he said. “Also, in the credit markets, they have not necessarily been driven by fundamentals. There are technical reasons going on too… We are in the growth camp. We don’t think there will be a recession. We have an inverted yield curve [whereby the longer-yield bonds pay more than the shorter ones]. There’s always an inverted yield curve heading into a recession. But not every recession has an inverted yield curve.”

DWS believes, as does a number of other funds managers, interest rates will be lower for longer. They prefer credit to sovereign bonds and fixed income to equities. This is the strange thing about the current investment climate: it’s all about fixed income.

“If I have one story about the structural shifts at the moment,” he said, “it’s about Asian credit. A lot of Asian funds are now buying their own markets.” Australia and New Zealand are in a “pretty good position”, Taylor said. “Certainly, compared with Europe.”

He said the two big calls, right now, were international versus the US and value versus growth. Over the next three or so months, he said, there would be a “flutter”, up and down, with the value versus growth story. But Taylor and his colleagues are in the growth camp. Interestingly, history tells us that’s not a good camp to be in. You are much better off in the value camp

– G.B

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