June 14 2011

The global economy continues to face a number of challenges: increased unemployment in the United States; increasing evidence of a slowdown in China; rising interest rates in Asia; Europe’s seemingly endless struggles with its debt and its politicians’ blinkered refusal to accept that the euro is structurally flawed; a Japanese economy that, yet again, promised so much yet was thoroughly derailed by the earthquake.

Unsurprisingly, investors reacted badly.  The MSCI World Index is down some 4.8% in the month to date which translates into trillions rather than billions of pounds.  And US Treasuries, once again, were the ‘safe haven’ of choice and yields fell for the ninth week in a row – clearly ignoring the giant US budget deficit.

So where does this leave us?  Well, there are three scenarios we need to consider –‘slowdown’, ‘plodding along’ and ‘growth’.  Slowdown is clearly the biggest risk to equity investors, but we feel this is the least likely outcome and the scares of the US economy are overdone and that an outright recession there is very unlikely.

Plodding along and growth offer equity investors more cause for optimism.  We have argued for some time that the quality companies are in good financial health, and that they should be the focus for investors.  The combination of some political resolution in Europe, an economic rebound in Japan, and consistent positive data from the US would probably lead to a recovery in global equity markets, and it is this scenario that we favour.

Some words of caution.  The MSCI World Index is still up more than 22.3% over the last 12 months and, in our view, equities no longer look cheap.  We must watch the decisions made in China over the coming months carefully – if they get things wrong then the economy could slow more than expected which would reverberate across the globe, unsettling emerging markets and spelling trouble for commodities.  And there are also signs that Europe’s powerful German engine room is starting to peak.

For now, we must remain patient and mindful of the outlook for the second half of 2012 and early 2013 before getting too carried away with the prospects for the rest of this year.

Regulatory Notice

European Investment Management Limited is authorised and regulated by the Financial Services Authority. Registered in England and Wales number 06931664. Registered Office 98 Queens Road, Brighton, East Sussex BN1 3XF.

This information has been prepared using all reasonable care. It is not guaranteed as to its accuracy and it is published solely for information purposes. Our opinions are subject to change without notice and we are not under any obligation to update or keep this information current. It is not to be construed as a solicitation or offer to buy or sell securities and does not in anyway constitute investment advice.

The value of investments can fall as well as rise and you may not get back the amount you have invested. The income from an investment may fluctuate in money terms. If an investment involves exposure to a currency other than that in which acquisition of the investment is invited, changes in the rates of exchange may cause the value of the investment to go up or down. Past performance is not necessarily a guide to future performance.

All rights reserved. No part of this may be reproduced or distributed in any manner without our written permission. European Investment Management Limited is a registered trademark. © 2011 European Investment Management Limited.