By Percival Stanion, Chairman, Strategic Policy Group
Baring Asset Management (Barings), London
(Barings is the Subadviser to the ASTON/Barings International Fund)
There were only minor changes to our economic outlook this month, though this belies our ongoing debate about the potential strength of the U.S. economy next year. The recent pick-up in the likes of industrial production data would perhaps support a broadening of economic activity that, without the drag imposed by government spending cuts and tax rises in 2013, might see the U.S. economy accelerate to above trend growth. In this case, our forecast for U.S. growth would look a little conservative.
On the other side of the argument, there are concerns that the abovementioned rise in industrial sector activity is nothing more than a restocking of supply, driven by strong performance from the U.S. consumer over the last 12 months. Notably, industrial data has generally tended to disappoint during this period.
So what of the consumer now? Well, we’ve seen a marked rise in mortgage rates and the full effects of sequestration (the introduction of automatic government spending cuts) take hold the last month or so. This has raised question marks over the ability of the recovery in housing and related activity to be the backstop of a resurgent U.S. economy. Data in the coming months should provide greater clarity, but for the time being we are happy with our analysis that points to growth in the U.S. being around trend a year from now.
We retain our positive overall stance on equities. There were some valuation concerns in the U.S. market following its sustained strong performance as well as whether more economically sensitive areas such as Emerging Markets and the Materials and Industrials sectors can perform better from here. There was also uncertainty about the market performance expected from Japan (where recent economic data has been less supportive and where we would likely have to wait several months for the government to roll out further economic reforms). Meanwhile, we also recognize that the improving economic outlook in the UK raises the specter of earlier-than-expected interest rate rises. A subsequent strengthening of the pound would have negative implications for UK exporters.
After much deliberation, we decided that our enthusiasm for the U.S. has moderated. We are also less positive on the markets in Japan and the UK than we were. In terms of sectors, we upgraded Materials, a move debated the previous month following a sharp decline in this area.
Although we see the potential for such economizing areas to perform better over the coming months, we have not yet moved to upgrade Emerging Markets given the fact a number of developing economies face significant reform issues in the near-term.
The information contained in this article is provided by Baring Asset Management (“Barings”), a subadviser engaged by Aston Asset Management, LP (“Aston”). Barings is not an affiliate of Aston and their views do not necessarily reflect those of Aston.
This material is not intended to be a forecast of future events, does not constitute investment advice, and is not intended as a recommendation to buy or sell any security. Investors should consult their investment professional regarding their individual investment program. Since the date of this report, economic factors, market conditions and Barings’ views of the prospects of any particular investment may have changed. Investors should consider the investment objectives, risks and associated costs carefully before investing. Forward-looking information is subject to certain risk, trends, and uncertainties that could cause actual results to differ materially from those predicted. Past performance is no guarantee of future results.