The world has come a long way from the overwhelming fear that dominated capital markets less than a year ago. Much of this follows from the swift action taken by governments globally. Further there has been the anticipation of a return to more favourable, or at least more respectable, economic conditions which have, in many areas, stabilised or even showed signs of a marginal improvement.
But we’re certainly not out of the woods just yet. The cost to governments around the globe has been immense and they have used every tool at their disposal, tested or untested, to bring about the current air of stability. However, the root causes of the current financial woes have yet to be properly addressed and the real hard work and policies that are sorely needed have yet to be done.
Western governments have taken onboard a mountain of corporate debt and backed it with their nation’s reputations. Further, in the short-term at least, they have been the spenders of the last resort in an effort to kick start their economies. Nevertheless, as a whole, the western nations remain just as indebted as they were heading into the financial crisis but now with lower levels of economic output. Further, the cost of the stimuli put in place by western governments has been great.
These factors are burdens and risks to future growth as are the western governments’ more recent realisations that that they need to restrain and cut their levels of spending.
To this end measures such as quantitative easing, an abstract form of printing money, have had their obvious attractions, but they are not a free-ride. If all goes well, they are perhaps just a more palatable way for western governments to address the global imbalances that have led us to today’s economic climate. In the meantime emerging market economies look better positioned relative to western nations while the very same western nations continue in their game of competitive devaluation.
Such themes are very close to our hearts at T. Bailey and contribute to our longer-term pro-Emerging Market stance. Currently 31.2% (1 October 2009) of the T. Bailey Growth Fund is invested in the Far East (excluding Japan) and Emerging Market regions, significantly greater than the typical exposure to these regions in a global equity portfolio. It is here that we seek to capture the longer-term effects of the drain of power from the West to the East as some of the global imbalances unwind.
A similar stance also appears in the T. Bailey Cautious Managed Fund which currently has a specific exposure to Emerging Markets and significant allocation to gold as a real store of value in light of the untested monetary policies currently being undertaken by western governments.
Submitted by: Elliot Farley, Assistant Fund Manager
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