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Adviser  >  News  >  August 2008  >  Investment Outlook - Robert Talbut, Chief Investment Officer, RLAM

Investment Outlook - Robert Talbut, Chief Investment Officer, RLAM

On the anniversary of the credit crunch we still believe it's appropriate to adopt a relatively cautious approach to both the economic outlook and that for financial markets. Overall I'd characterise the last twelve months as being broken into periods where investors believing they've overcome one set of problems only to find that another set emerge quickly after. While undoubtedly progress has been made in addressing some of the serious downside issues I still believe that expectations remain too optimistic on economic growth and company earnings not only for 2008 but also particularly so for 2009.

Despite some worryingly scary headline inflation numbers currently we believe that we are within sight over the next 2-3 months of a peak in inflation. If this comes about then markets should become more sanguine on the outlook for interest rates. Instead of factoring in the prospect for further rises we should move to starting to discount cuts to UK/EU rates in 2009. However there are increasing signs that global growth is on the slide, not only in the US/UK but also in Europe and the Far East, and we think there needs to be a significant adjustment to the current expectation for a decent bounce in growth in 2009 towards expecting a pretty subdued outcome.

On the whole topic of 'sub-prime' and the downgrading of value in the huge amount of bonds that were linked to this market, we can still not say that we've reached bottom. While housing continues to decline the value of these assets will continue to come under pressure. However for the banks which have been heavily hit by these developments we will increasingly see them take further hits brought about by the generally slowing economy and the normal affect this has on bad debts as consumers and corporates struggle. Hence we still see a very restricted supply of credit to the economy which will hold back any economic recovery through 2009.

Hence we still see a tough operating environment for the corporate sector and foresee further marked downgrades to earnings forecasts. This has negative implications not only for equities but also corporate bonds. It is very likely that we'll see further corporate casualties over the next 12 months and others having to call upon investors to help in refinancing the business.

Therefore, we still do not see the conditions in place for a sustained upward move in risk assets. Hence, we've maintained an overweight position in cash across the funds. Of course the outlook I've painted is similarly negative for property returns. Capital values will continue to come under pressure as the lack of buyers weighs on valuations and the weakening economic trends will put pressure on rents. Therefore we remain very underweight in property assets.

However, despite this cautious outlook we remain on the lookout for a buying opportunity for risk assets and do believe that we are getting closer to such a time. When the disappointing outlook for growth and corporate earnings becomes more baked into expectations then one of the major preconditions for us would be signalled. If combined with a marked change in interest rate expectations then we will be looking to increase our exposure to risk assets and in particular equities.