- UK at highest risk of a double dip, but UK equity market is attractively priced – 

- Taiwan could be one of the ‘success’ stories of 2010 –

London, 20 January 2010: Baring Asset Management (Barings) believes that a recovery in the cost of oil and the stabilisation of food prices after the falls seen last year mean that inflation is likely to continue to rise. How the authorities respond to this will be one of the key factors affecting the markets in 2010.   Given this, Barings’ favoured investment theme for the year remains a long-term play on real assets as they offer a degree of protection against the risk of rising inflation in the future. The fund manager continues to believe in the supercycle for commodity prices. 

Barings warns that the global economic recovery is sub-par, and that the markets will be dominated by significant volatility and uncertainty leading to a dispersion of growth that will be much more marked in 2010 than it was in 2009. This will lead to an ‘alphabet soup’ of recovery shapes. In a stark warning for the UK, Barings believes it has the highest risk of a ‘double dip’ recovery.     Andrew Cole, director of Asset Allocation, Barings said: “We are currently experiencing a recovery which should leave the world economy growing at a respectable pace, but slightly below the long-term growth rate. However, this recovery will take many different forms around the world and investors need to take great care to select the right investment strategy in what will be very volatile markets.    “One factor of intense interest in 2010 is the central banks’ exit strategies from their emergency policy settings. Some time this year they will have to start testing the waters, probably starting with public discussions of the “normalisation” process. This will start as early as the first quarter and will initially focus on withdrawal of the emergency liquidity measures. Then, as this is accomplished the debate is likely to shift to the interest rate outlook. We expect actual rises here during the second half of 2010. How central banks and governments respond to this and to what extent their actions are co-ordinated, will be one of the most important factors to monitor for investors this year.”    ‘Alphabet soup’ recovery Overall, Barings is positive on the investment outlook for 2010, but warns that careful market selection and timing will be paramount in highly volatile markets. In terms of the best growth opportunities for investors, it expects Asia and the developing countries generally to see a “V” shaped recovery, where the pace of activity picked up again relatively rapidly. In the US and Continental Europe, the shape is likely to be closer to a “U”, with slow growth until recovery begins. Barings believes Japan is likely to continue with an “L” shaped profile, where there is little sign of recovery for an extended period.   Barings believes that the main driver of economic recovery in 2010 will be the inventory cycle. As companies rebuild their inventories, it expects to see a pick-up in industrial production and trade. The rebalancing of growth should trigger greater final demand from customers in Asia, with other developing countries playing an important part.   Equities over bonds Barings’ overall investment stance continues to favour equities over bonds. It believes that government bonds are expensive and do not offer a sufficient risk premium to protect investors from inflationary risk over the long-term. Cash, while safer, offers a negative real rate of return, after inflation.    Barings believes that equities are no longer as attractively valued as they were at the start of 2009, but still offer reasonable value given the prospect of a mediocre rate of economic growth around the world. Within equities, Barings continues to favour reasonably priced growth on offer in Asia and the developing markets. It is particularly positive towards Taiwan because the country’s relationship with mainland China has thawed and transport links are re-established. Barings expects to see a healthy inflow of capital back into the Taiwanese equity market.   In addition to its focus on emerging markets, despite any misgivings over the UK economy, Barings believes that the UK equity market is currently attractively valued and offers global exposure.       Its least favoured equity market is Japan as it believes the country’s manufacturing and services continue to be hollowed out by rivals elsewhere in the region, which are able to compete aggressively on price as well as quality.   Sectors  Barings’ least favoured sector is financials. After a strong performance, it believes that this area of the market is looking expensive and will face the headwind of a negative regulatory environment for some years to come. It is also underweight in the consumer discretionary, healthcare and utilities sectors, but overweight in energy, information technology, materials and telecommunication sectors.