Richard Martin Co-Manager of the T. Bailey Growth Fund and T. Bailey Growth Fund LITE shares his views on the year ahead.
Europe dominated the news last year and 2012 looks set to be no different. The euro project was fundamentally flawed – only politicians and economists could have imagined it would work – and the consequences will be felt for some time to come.
Michael Lewis’s recent book, Boomerang: The Meltdown Tour highlights the folly of thrifty Germany being yoked to Greece, where he reports the average Greek railway worker earns €63,000 and the total railway wage bill is four times ticket revenue.
Germany has been the main protagonist in favour of the euro and a major beneficiary but seems unwilling to provide unlimited support.
Failure is now a possibility but so devastating are the consequences that Europe’s politicians will probably muddle through. Even so, the heavy debt burden and the lack of competitiveness of southern countries will mean slow growth for years.
The UK is an offshore satellite of Europe and will suffer accordingly, its problems exacerbated by high debt. However the Government’s determination to rein in borrowing should ensure that interest rates remain low, while an independent currency provides further protection against the worst of the euro zone travails.
The USA is perhaps best placed to prosper in 2012. The US dollar is seen as a safe haven; the economy is demonstrating its dynamism and corporate earnings are holding up above expectations. But those squabbling politicians! With a presidential election in November there will be plenty of chances for them to derail recovery.
In our opinion it is clear that it is to Asia and Emerging Markets that investors will have to turn to seek outperformance.
These areas have not decoupled from the global economy and cannot escape the effects of a slowdown in world trade but they do have relatively low debt levels and thriving domestic consumption.
Inflation has peaked in many countries, indeed towards the end of last year the Chinese government cut the Chinese banks’ reserve requirements by 50 basis points – the first cut since 2008. This is one of its key policy tools and suggests that arresting slowing growth is now a greater priority than inflation.
China’s economic growth slowed during the third quarter of 2011 to 9.1% – down from 9.5% in the previous quarter, according to China's National Bureau of Statistics. Even if these figures are not as open to the same rigorous criticism and analysis as those of a body such as the Office for Budget Responsibility (the independent forecasting arm of the UK Treasury), they remain impressive.
Growth in 2012 looks likely to be close to 8%, which in this massive economy still implies strong demand for resources.
That said, these Emerging Markets remain volatile as a result of hedge fund action and panicky Western investor flows and investors will need a tolerance for this.
Japan cannot be ignored. The Japanese stock market offers some of the most attractive valuations of any in the world and this could be the year it delivers strong returns.
In short:
• Remain wary of Europe and consequently the UK (though large cap exposure in the UK can be helpful given the natural exposure to Emerging Markets and Asia of many of the FTSE 350 component companies)
• Revise upward any underweight positions in the US within portfolios
• Follow growth, through Emerging Markets and Asia
• Don’t dismiss Japan
• Look to active managers with stock-picking style (avoiding banks)
The T. Bailey Growth Fund invests globally, from the UK to emerging markets. It is a fund of funds investing in global equities and is designed for long-term investors. The aim of the T. Bailey Growth Fund is to provide capital growth over the medium-to-long term and to out perform the IMA Global sector average over rolling three-year periods.
Important Information/ Risk Warnings
This article has been produced for information purposes only and represents the views of T. Bailey Asset Management Limited (‘TBAM’) at the time of writing.
It should not be construed as investment advice, and no investment decisions should be made without first seeking advice.
Please note that T. Bailey Asset Management Limited do not provide financial advice to private individuals. If you have any doubt whether the T. Bailey funds are suitable for you and you wish to receive advice you should contact a financial advisor.
Full details of the T. Bailey Funds, including risk warnings, are published in the T. Bailey Funds’ Simplified Prospectus.
The funds are exposed to global financial markets and are therefore subject to market fluctuations and other risks inherent in such investments. The manager may enter into derivative transactions for efficient portfolio management purposes (including hedging). The value of your investment and the income derived from it can go down as well as up, and you may not get back the money you invested. Investments in overseas equities may be affected by changes in exchange rates, which would cause the value of your investment to increase or diminish. Capital appreciation in the early years will be adversely affected by the impact of any initial charges, and you should therefore regard your investment as medium to long-term.
Every effort is taken to ensure the accuracy of the data in this article but no warranties are given. All sources TBAM unless otherwise stated.
Issued by T. Bailey Asset Management Limited. T. Bailey Asset Management Limited is authorised and regulated by the Financial Services Authority No. 190291and is a member of the Investment Management Association.
Submitted by: Richard Martin
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The value of your investment and the income derived from it can go down as well as up, and you may not get back the money you invested. When investing in retail unit classes, capital appreciation will be affected by the impact of initial charges and you should therefore view your investment as a medium to long-term holding.