Where’s the money going?

As business and commerce began to recover, investors may want to know where to put their money, especially since uncertainty in the form of job losses and the size of fiscal deficits continue to haunt the more advanced economies.

Governments have pumped in trillions of US dollars to unlock gummed-up credit markets and to stimulate domestic demand as trade slowed and external demand dried up.

Schroder Investment Management Ltd head of multi-asset for Asia Pacific Al Clark tells StarBizWeek that the global economy faces a W-shaped recovery with an upturn in growth this year followed by a moderation in the first-half of 2010.

“We expect the world economy to experience a mild recovery during the second half of this year, due to the turn in the inventory cycle and expansionary fiscal policy,” he says.

But Clark cautions that growth is expected to fade in the first half of next year once the impact of the inventory cycle has passed and consumer spending remains constrained by ongoing de-leveraging among households and higher commodity prices.

“Given this current market environment it makes sense to spread investments across a wide range of opportunities, so as to protect against losses from any one particular investment as the underlying fundamentals are fluid and changing,” he says.

Clark says the stimulus packages and expansionary monetary policy of governments around the world has left a trail of large deficits and associated debt burdens.

He says investors are now beginning to focus on the size of these deficits while “there is also the issue of trying to kick start a debt-laden consumer by offering them more debt”.

Morgan Stanley Research analysts led by Jonathan Garner says in an early November report that there were headwinds lurking around the corner for emerging market equities in the form of monetary policy tightening in Asia and the US and, higher crude oil prices.

“Valuations are neither expensive (versus 24 months ago) nor cheap (versus 12 months ago) in our view,” he says, adding that on a base case of 40% US dollar earnings-per-share growth, the MSCI Emerging Markets index is trading at 13.4 times 2010 estimated price earnings ratio.

Garner says the scenario-weighted year-end 2010 price target for the MSCI Emerging Markets index is 1,200 representing 28% upside from current levels and 22% above previous target price.

Clark advises diversifying a “mainstream” portfolio of equities and bonds by adding an exposure to a varied range of different assets from higher risk equities and bonds to alternative assets like property, commodities, hedge funds and private equities.

He says this can, at the overall portfolio level, lower volatility and increase potential returns over the long-term in what is becoming an increasingly complex investment environment.

Clark is more bullish on equities and have begun to trim positions away from bonds as the credit story “has probably seen the best part of its rally”.

However, he feels that even though spreads have narrowed, high-yield and investment-grade bonds still have further gains ahead as investors continue to move into these papers from the money markets.

“Although the markets have run a long way, we believe that strong liquidity conditions and continued earnings growth should remain supportive while the return of mergers and acquisition activity bodes well for equity markets,” Clark says.

He says emerging markets still gives the best exposure given the strength of the liquidity theme but some caution is warranted as markets “are starting to look overheated”.

“Within Asia, we prefer South Korea given that the economy has moved through the inventory correction more rapidly than many of its peers in the region. This economy also boasts a stronger fiscal position relative to markets elsewhere,” Clark adds.

He remains “neutral” on property as it is showing early signs of bottoming after significant price falls but was “positive” on commodities, specifically agriculture and gold.