- Chinese inflation – should lead to a lower $A
- Emerging markets inflation
- European debt woes not really resolved
- US economy may surprise on the upside, largely due US multinationals
International equity fund manager, Insync Funds Management, considers the key global investor themes of 2011-2012:
- China – we believe inflation in China will emerge as a much bigger theme than the markets are anticipating in the coming months
After the GFC China really opened the floodgates of monetary and fiscal policy, money supply has increased over 50% in the last two years and the Government has embarked on a public works program that is the biggest since WW2 – to put this into context there are currently 7000 skyscrapers under construction in China compared to only three in the US!
Fixed investment is running at over 50% of GDP and this is clearly unsustainable. (the US peaked at 18% in their recent construction boom). Our sources tell us that inflation could be double the reported figure of 5% and this will require China to slow growth dramatically to bring this under control. This will have an obvious impact on the Australian economy and we expect the Australian currency to weaken over time.
- Higher inflation is not only limited to China; much of the emerging world has inflation rates that are higher than the authorities would like
In fact, this is one of the primary causes of the unrest that is sweeping the Middle East. This will require a tightening of policy in those countries as well as slower growth.
- In Europe we do not believe the peripheral debt issues have been resolved but have only been deferred
This is confirmed by the credit markets where spreads are still at very high levels. At some point Governments will have to face reality and look at some form of restructuring – which will most likely involve some pain to bondholders.
- Finally, we believe the US economy may surprise to the upside this year
Corporations (especially large multinationals) are sitting on record levels of cash and this combined with accelerated depreciation in the US will lead to a decent recovery in corporate investment. In addition, the US is still home to the best companies in the world, many of which have large global operations (50% of the S&P earnings are ex US).
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