As the global economy slowly shifts from crisis to recovery mode, investors are sniffing out higher returns after four years of stowing their savings in havens such as government bonds and gold, Tom Arnold reports
Henk Potts, the director of global research and investments at Barclays, believes investors are not holding enough risk to reflect a generally rosier global outlook.
Here, he talks about how he likes stocks in the United States, China, Taiwan and South Korea and why he is optimistic about oil prices.
qAre you optimistic about the world economy?
aWe are fairly positive about the prospects for the global economy, notwithstanding different prospects for different regions. Probably the most positive geography we have is the United States, continuing to believe the economic recovery will be not spectacular but continues to be pretty steady. There's a wide-range of measures you can point to that suggest the US is looking an awful lot better than it has done and an awful lot better than elsewhere in the developed world. We are looking at growth of about 2 per cent in the US this year, despite the concerns revolving around the fiscal cliff and the problems of that and the debt ceiling.
Is Europe still doom and gloom?
I don't think it is. The perception of the European debt crisis has changed from a markets perspective. We've seen a pick-up in decisive action, particularly from Mario Draghi [the European Central Bank president]. What you've seen is the European Central Bank backstopping the euro zone, calming market nerves and giving politicians the time they need to introduce those structural reforms. They do need significant structural reforms because the end goal the markets are looking for is economic, fiscal and political integration. They need a road map for that and they need to understand how growth will be created within the euro zone, how jobs will be created. There's still challenges. We estimate it may take a decade before countries get to that level of integration and competitiveness the market is looking for. But slowly the euro zone is moving along the right road.
Do you see the euro zone emerging from recession this year?
No, we have flat growth for the euro zone for this year, better than the 0.5 per cent contraction we had last year, probably a little better as we look at 2014. I think we have growth of 1.5 per cent in 2014.
How do you see the situation in the UK economy?
The United Kingdom had a very miserable recession and failed to emerge from that with any real conviction. We had another contraction in the fourth quarter of last year. Austerity measures introduced by the government are the right road in an effort to try to deal with the debt and the deficit. Perhaps more of a concern is that domestic consumption remains very weak indeed. Unemployment elevated, not as high as elsewhere in Europe, but pay growth is very poor indeed. We are looking at slow growth for the UK, about 1 per cent growth for the year.
What about China?
When it comes to China you have to be realistic about the economy. It is going through transition. We think of it as a manufacturing powerhouse today, increasingly it is going to be a consumer-led economy. That transition will be important for the global economy and important for China in terms of smoothing some of that growth. The 10 per cent plus growth we used to talk about in the past few decade is unsustainable. It's a bigger, more mature economy going through a transition. But we still expect growth of 7 to 8 per cent growth per annum over the course of the next five to 10 years.
Why are you visiting the Middle East?
We are here to tell clients they need to be investing internationally. The one thing you tend to find, and this region is no different to others, is there's a home bias. They tend to have too much of their wealth linked to the region they know the best and there's probably better or as good opportunities elsewhere.
With the economic backdrop you've been describing, where should investors be allocating their wealth?
The biggest risk clients have at the moment is that they don't have enough risk within their portfolio globally. We've been optimistic about equity markets and risk assets for a long time. I talk to a lot of clients and ask them, 'When do you invest in stock markets?' and they all say, 'I buy when they're weak and cheap,' and they're lying. What they really do is buy stocks when they're strong and expensive, when the headlines are great. Then you've missed the opportunity. In the past two years there has been a mis-pricing of risk. The macro headlines have been dark but the corporate picture has been bright. That is where the opportunity was but we still believe that will continue to be a theme into 2013.
You suggest a relatively high allocation of a typical portfolio in developed market equities. Is that a change from recent years?
We've increased our weighting in developed market equities. We like it, it's been a great performer and we continue to believe it will outperform. Our favourite markets would be the US, more selectively Europe, particularly companies based in Europe but have a broader geographical reach into Asia, for example, over the UK and Japan. In emerging markets, we like China, Taiwan and South Korea.
Are there any commodities you're particularly bullish on?
I particularly like precious metals but not necessarily gold as we are a bit more cautious about the ability of gold to reach the elevated levels some analysts have been talking about. But we like platinum, we like palladium. Car data has been better over the course of the past couple of months and we expect a better year this year. There's also potential for supply shock from South Africa, given the problems they've had in their mining industry. We also like corn, given the potential for a weak harvest and a supply disruption coming through. We are also positive about oil. We have a year end price target of US$125 a barrel for Brent crude and an average price for 2015 of $135 a barrel.
Longer-term, do you have any view on oil prices, given the push into shale in the US?
There's a lot of hype around that. I've looked at some of the reports from the International Energy Agency as a bit of a guide on that and there are some big headlines on it: the US to become the biggest oil producer, overtaking Saudi Arabia by 2017, the US to become self-sufficient in the next couple of years, and to overtake Russia as the largest producer of natural gas. A lot of people jump on that and say energy prices are going to collapse because of this. But if you look further through the report and some of the estimates as you go out to 2030 or 2035, energy demand will increase by a third over that period because of strong demand coming from the likes of China, India and the Middle East. While there's all the excitement around technological advancement, some of which needs to be proved, there's as many bullish statements around demand as population increases.