Q1/2011 Outlook: Let them eat cake by Subodh Kumar

Our asset strategy is a barbell of cash (12%) above recent cycles and favors quality of delivery. Our emphasis on quality includes information technology, energy and healthcare in equities (63%) but has long bond exposure (20%) well below the last two cycles. Hedging via exposure to precious metals and the well managed advanced smaller currencies as well as major Asian currencies remains a key theme. Political factors are likely to dominate over the next six months , more than the undoubted recovery in corporate earnings that will increasingly come under scrutiny for revenue growth. Increasingly, the economic pressures in advanced economies have to do with unemployment and the cost of government. In emerging economies and increasingly in advanced countries, they have to do with inflation as well as with income distribution skew.

For both, authorities remaining fixated on finance looks untenable as it leaves the impression for the common man, of an official attitude of let them eat cake – as politically unacceptable today as then for Marie Antoinette. The environment indicates for capital markets, a continuation of risk premium re-appraisal and volatility that started from Europe but now also has a stronger global political dimension than is likely fully understood. Tough US budget reconciliation lies immediately ahead. In Europe, from Ireland to France to Greece, a populist backlash has mounted over benefit cuts versus financial largesse. In emerging economies, the brutally suppressed revolts in Iran and Thailand of mid 2010 have expanded into Tunisia and the Middle East. Considerable angst on inflation exists in major countries like of China and India. It all has at least partially to do with reaction to the distribution of costs (perceived by the poor) and benefits of globalization (visibly by the affluent, well connected).

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