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Coutts Outlines Drivers for Developed and Emerging Market Growth in 2011

Coutts & Co’s global investment team today published its 2011 Investment Outlook, highlighting the key drivers of investment returns for the new year.

Coutts expects 2011 to be another positive year for risk assets but a repeat performance of 2010 with high-single or double digit returns from most asset classes, is unlikely. In developed equity markets Coutts predicts yield and value to outperform growth, and equities are likely to offer greater protection for returns than fixed income. Other highlights are that prime property will also be prized for its secure income stream and slow growth in developed economies will heighten the attractions of emerging-market equities and currencies.

The investment team, led by Global Co-CIOs Gayle Schumacher in London and Nick Cringle in Hong Kong, highlighted the following risks and opportunities for investors in 2011:

1. Yield for investors in developed economies will be heavily impacted by weaker growth in these markets, forcing investors to adapt investment strategies in light of a prolonged period of low rates, further rounds of quantitative easing or asset purchases by major central banks.
   
   "Not all forms of yield are as safe as they once were and the focus of credit risk will also continue to shift from corporate to sovereign debt," said Gayle Schumacher, Global Co-CIO, Coutts & Co.
   
2. Developing economies and parts of the developed world supplying commodities, capital goods and services for expansion in these markets will be increasingly in demand.
   
   "We believe investors seeking capital growth will be increasingly willing to pay a premium for exposure to the ‘growth nexus’ of developing economies," said Gayle Schumacher.
   
3. The developed world will experience slower growth than pre-crisis as the trend will be to paying back debt and minimising spending.
   
   "On a more positive note, as financial institutions and markets continue to slowly heal, low interest rates should gradually exert stronger stimulus on the economy. We therefore see the sharp slowdown in growth in the middle of 2010 as temporary and expect economic activity to reaccelerate into 2011, although still at a slower pace than the first half of 2010," said Gayle Schumacher.
   
4. Within developed markets, investors will see divergent prospects.
   
   "The combination of fiscal austerity and lack of competitiveness means growth in Greece, Ireland Portugal and Spain is likely to be much lower than the European average in 2011. The risk of contagion from the debt crisis in peripheral euro-zone governments remains elevated, particularly among the peripheral economies. Meanwhile, the European banking system is still heavily reliant on government support and is highly vulnerable to deterioration in the economy, sovereign debt shocks and funding strains," said Gayle Schumacher.
   
   "Outside the euro-zone, prospects for recovery are similarly diverse. In emerging Europe, growth in economies that experienced the mildest downturns, such as Poland, and others that faced the crisis with relatively strong household and bank balance sheets, such as Turkey, are likely to continue gaining strength as global trade and capital flows return to more normal levels. However, those that experienced unsustainable domestic booms, like Bulgaria and Latvia, or have vulnerable private or public sector balance sheets, such as Hungary and Romania, are expected to recover more slowly."
   
5. Asia: Contrasting fortunes
   
   "Resilience in Asian domestic demand, thanks in part to proactive government and central bank stimulus, has offset a decline in exports. The handover from public-sector-driven to private-sector-driven growth is well underway. Robust activity in China and India is in turn helping to power growth in the rest of Asia.
   "However, In contrast with the rest of Asia, Japan’s economy will be encumbered by an ageing population and an extremely high level of debt relative to GDP. It will face increasing demographic and debt headwinds that will inevitably drain the already weakened drivers of sustainable growth. In particular, the combination of ageing voters and a lack of central bank accountability make Japan structurally prone to deflation," said Gayle Schumacher.
   
6. Investors should hedge against inflation – but expect to see diverging inflation trends in emerging and developed markets
   
   "All out war on deflation will increase the risk of inflation in the long run. When it comes, the transition from deflationary pressures to rising inflation will be very costly in real, or inflation-adjusted, terms for investors holding cash or conventional government bonds. While we don’t believe this shift is imminent, it is certainly worth hedging against. We see it starting in the US, followed by the UK, then Europe and eventually Japan," said Gayle Schumacher.
   
7. Equities, commodities and non-government debt will benefit if the market continues to price out the probability of a US double dip in 2011.
   
   "History suggests that de-leveraging an economy takes as long as five to seven years. However, even allowing for a de-leveraging financial system, the probability of a US double dip over the next six months is only about 30%. In the long run, the process of rebalancing and de-leveraging developed economies will ultimately result in a global economy that is less vulnerable to shocks," said Gayle Schumacher.

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