Ian MacFarlane, BCA Chief Strategist, Global Asset Allocation Strategy, returned from Hong Kong this week. This morning he was kind enough to sit down with me and provide some broad strokes on his recent meetings with clients and prospects.
Nanci: How was the general mood?
Ian: Cautious optimism. Puzzlement over the big rally in U.S. equities and concern regarding lagging Asian markets over the past month. There was a strong focus on politics north of the border (China), and the upcoming elections in HK for the Chief Executive role.
Nanci: Was there any common thread in questions asked?
Ian: There were two key issues that were brought up throughout my meetings:
- Could the recent momentum in U.S. markets be maintained?, and;
- How bad would the data in China have to get before signs of improvement begin to emerge?
The first 1/2 of the year we see China as an economic headwind and the U.S. as a tailwind. This has already been reflected in the underperformance of the industrials and materials and the outperformance of stocks exposed to the U.S. domestic economy.
As we move into the second half, there is a hope that the China story will turn into a tailwind – as policy responds to weak data.
One of the issues that the Communist Party elections in October 2012 make the timing of fiscal reflation problematic. Do they wait and let the new Administration start with a clean slate, or to they react to the weakness and start reflating now? It is interesting to note that the high frequency data (i.e.: electricity production) paints a much more pessimistic picture than GDP numbers.
Either way, reflation will happen, it is just a question of how long it takes to impact the economy.
Nanci: And the U.S.?
Ian: Much of our debate and/or discussion focused on the timing of QE3. There is a tremendous fiscal shock coming for the U.S. next year, even if they do nothing in Congress (fiscal drag of 2% – 3% on already agreed upon expenditure cuts and tax adjustments). Monetary policy will have to compensate, and the question is, will the Fed be proactive and introduce QE3in the second half in anticipation, or wait until 2013?
I did get the sense that many firms had not participated fully in the rally. Rather, they were somewhat dragged in around February, which explains a bit about the recent overshoot in markets.
Nanci: Was there a feeling of too much, too fast? Are Portfolio Managers moving out of equities?
Ian: No. Overall they have raised and/or are raising equity positions – that being said, there is a firm belief this is a liquidity driven rally. Starting with the LTRO facilities of the ECB last October, and still going strong – but for how long? Unless the real economy data continues to improve, the timing of QE3 in the U.S. will be crucial in determining how long this rally continues.
Nanci: Thanks Ian! Welcome back. I know clients are looking forward to the GAA Quarterly Portfolio Outlook on March 30. 2012.