Equity Outlook Positive, Skandia
Tuesday, June 15, 2010

Skandia Investment Group (SIG) remains overweight equities and believes the recovery will continue, despite the worsening debt problem in Europe, according to the group’s latest Monthly Asset Allocation Report.

The report, which is compiled by SIG’s Global Asset Allocation Committee (GAAC), also sees the group reduce its exposure to fixed interest on the belief that the ‘flight to safety’ rally the sector has seen will unwind.

Commenting, SIG CIO James Millard said:

“Global equity markets fell sharply in May as fears grew that the problems in Greece could spread to other European countries. This could undermine the recovery in Europe and the rest of the world. At the start of the month, European equities, the Euro and the government debt of a number of peripheral European countries fell sharply as fears mounted that Greece’s fiscal problems would spread. While uncertainty remains high in the short run we think that the economic and financial market recovery that began in early 2009 will continue and we remain overweight equities.”

“We have reduced our exposure to fixed interest from neutral to negative. Government bond yields in countries such as the US and Germany have rallied sharply over the last month, the result of a flight-to-safety. German bond yields are now close to their lowest ever yield. We think this flight-to-safety bid will unwind and have, as a result, reduced our exposure to fixed income.”

“We continue to prefer emerging markets over developed markets. Most emerging markets continue to grow at a rapid rate, while government debt levels are much lower than in the developed world. Over the last few months some emerging markets have been weighed down by tightening monetary policy in some countries. While monetary policy is likely to continue to tighten, we expect emerging markets to start to outperform strongly when it becomes clear that the end point of the tightening cycle is near.”

“We remain heavily overweight non-government bonds versus government bonds. Although non-government bonds performed poorly in May as the situation in Europe deteriorated, we think they should outperform going forward as the recovery in corporate profits continues.”