Fiscal risk rising: time to take some insurance

Fiscal risk rising: time to take some insurance

The global economic recovery continues to build, but the increased risk of sovereign default saw us reduce our exposure to global bonds over the quarter. Emerging markets remain the favoured asset class according to AXA Global Investors’ latest Quarterly Strategic Outlook.

“The recovery is proving to be hard work, but structural change was never going to be easy. The early signs are that the necessary rebalancing we need to see for a sustained recovery in global growth is starting to occur” said Chief Economist Bevan Graham

“There is still a long way to go, but should the next set of risks be successfully traversed, we could in future look back on recent developments as the dawning of a new age of global prosperity.”

The next task is the management of the “Great Unwinding”, the unwinding of the extraordinary monetary, fiscal and liquidity measures that were put in place during the darkest days of the crisis. The timing and sequencing of these moves will be critical.”

“In our view, the hardest task ahead in many countries will be getting fiscal policy back onto a sustainable path. Governments have got a difficult balancing act ahead as they try to support economic growth, maintain entitlements, cope with sharply lower revenue and try to keep public debt in check” Bevan Graham said.

“Sovereign risk moved to the fore over the quarter as concerns over Greece’s fiscal accounts shook investors into taking a harder look at other countries’ finances” said Head of Investment Strategy Keith Poore.

“Elevated budget deficits present upside risk to bond yields, particularly in the US and UK. We think it’s time to add a little more sovereign risk insurance to the portfolios.

“We have recently reduced our global bond allocation, placing the funds in domestic cash. We have also reduced our offshore currency hedge; because the NZ dollar usually falls during global risk events, increasing the offshore currency exposure adds further downside protection.

“With the global economy recovering and corporate profits rising, decreasing the equity allocation is too costly insurance at this stage. Thus we remain overweight equities, with emerging markets still our preferred asset class” Keith Poore said.

ENDS