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Compass April 2011 - Investing in a resilient recovery

This week’s Investment ViewPoint summarises the most recent edition of Compass, the monthly investment research publication from Barclays Wealth. The four main themes identified for April are: the terrible events following the earthquake and tsunami in Japan, unrest in North Africa and the Middle East, sovereign debt concerns in Europe and the changing interest rate landscape in Europe and the US.

Japan

Some of the damage done to Japan since the earthquake and tsunami of 11 March is irreversible. The loss of human life is devastating and the prognosis for nuclear power in the region is still to be determined. However, our experts would not place the economic prognosis for Japan in the same category. As discussed in a previous Investment ViewPoint – The Japanese earthquake and its global impact – Japan is a resilient nation and will no doubt undergo an incredibly effective and convincing recovery from this natural disaster.

In addition to the uncertainty that investors feel when events unfold extremely quickly (as they have done during this situation), Compass details three very specific effects – “the viability of nuclear energy will be questioned again; the global insurance sector will see its profits hit hard; the Western central banks may be a little slower to act on official interest rates than seemed likely, at least in Europe…”.

Events in North Africa

Events continue to unfold in Libya and Compass again states that “the human and political significance outweighs the likely economic impact”. Oil prices remain volatile but the commodity is relatively stable, given the political control in Saudi Arabia. As the largest provider of oil to the Western world, the importance of that stability cannot be overestimated. On a slightly different tack, it would be advisable for investors to keep an eye on events as they unfold in Bahrain. If the West is forced to intervene, that could be damaging to what is currently a strong economic relationship.

Sovereign debt in Europe

There remains a visible risk to European sovereign debt although politicians are now beginning to build “a more unified fiscal framework that has been missing from the euro architecture since its inception”. The economic circumstances in Europe continue to unnerve investors and are a destabilising force in the global recovery.

Global interest rates

Compass states that “the outlook for official interest rates is slowly hardening, and will inevitably fuel discussion of pending policy mistakes and renewed “double dip” risk”. It notes that interest rates are still at emergency levels and inflation is a growing risk. If governments are indeed forced to raise interest rates (Compass predicts this will happen in Q2), there will be a negative impact on mortgage and business borrowing costs, corporate confidence and relative returns on investment portfolios. The risk is that with a rise in interest rates, comes a rise in uncertainty and a fall in risk appetite.

Resilient global recovery

Despite the doom and gloom, Compass reassures investors that the global recovery still has considerable momentum. In particular, the US is less fragile than it was last year. Compass sticks by its previous line – investors should focus on developed equities, as that “is where prospects are brightest relative to expectations”. Although emerging markets are forecast to grow at a faster pace, they also face more pressing inflation and interest rate concerns.

Investors looking for exposure to international developed equities could consider International Trader. Our platform allows clients to trade in stocks listed on major US, Canadian and European exchanges. 

You should ensure that you research the regions you are interested in and fully understand the nature of the stocks in which you invest. Also bear in mind that investing internationally brings with it currency risk. Fluctuations in currency values could have a negative impact on the value of your investments.

For those with an interest in investing in Japan, or in commodities such as oil, you could consider using Exchange Traded Funds (ETFs) or Exchange Traded Commodities (ETCs).  ETFs such as the iShares MSCI Japan (IJPN), an ETF designed to track the MSCI Japan index, or ETCs such as ETFS Crude Oil (CRUD), designed to track the DJ-UBS Crude Oil Sub-IndexSM could be worth considering. 

You should be aware that the price of oil can be volatile and you may incur losses if you invest in oil-related products.  The value of investments in ETCs such as ETFS Crude Oil can go down as well as up and you may get back less than you invest.

You should ensure that you read and understand the full simplified prospectus for products such as ETFs and ETCs before investing.