Finding true market value remains a challenge

Jamie Cumming is an Edinburgh-based senior investment manager on the global equities team. Jamie joined Aberdeen via the acquisition of Edinburgh Fund Managers in 2003, where he was an investment manager on the Japanese equities team. Previously, Jamie worked for Grant Thornton Chartered Accountant and is a member of the Institute of Chartered Accountants in Scotland as an audit senior. In that position, he was responsible for auditing a wide variety of companies and pension schemes in Scotland. He shares his outlook for the global economy and the global equity market.

What is Aberdeen's opinion on the global economy? Does Aberdeen think that it will recover in the second half of this year?

Cumming: The well documented world imbalances occurred in an era where the market anticipated that the structural surpluses of Asian countries would be able to finance excess consumption of western countries looking out far into the future. The fact that this became the market view for a number of years emboldened many to ever bolder and bolder mechanisms to take advantage of this trend. Much leverage was used to maximise returns. Unfortunately market participants are re-learning that leverage works more powerfully on the way down than on the way up. The plans outlined by the US Treasury (PPIP) would appear to have more merits than previous efforts, but it is not still clear that banks will be willing to sell assets that private investors will make money off, nor will private investors be willing to be altruistic in taking the most toxic of the legacy assets from the banks, at a price that the banks would be happy to sell them at.

Ultimately the old stumbling block of realising a true market price remains a key issue. Despite the proactive efforts of many governments and monetary authorities, the global deleveraging process will be ongoing as financial institutions and western consumers repair balance sheets. At what point this process plateaus remains unclear, but what is clear is that for a sustained recovery to take hold the western financial system needs to return to some level of normality and asset find a clearing price. On this basis a recovery in the second half of 2009 is probably too optimistic an expectation.

Is Aberdeen optimistic or pessimistic towards the global equity market? What data, signal, or index reflects this?

The volatility in global markets has made the last few months an extremely uncomfortable one for investors, as the unwinding of the credit bubble has ultimately infected the real economy. The pace and extent of the resulting falls in markets reflects the unprecedented nature of this truly global down turn.  In times like these it can be difficult to focus on positives as economic and corporate news appears to be unwaveringly negative. Increasingly common are newspaper articles questioning the future of capitalism, which is perhaps fairly typical of the type of navel gazing that many market participants are undertaking at present. However, such anecdotal evidence, combined with what we believe are the more attractive valuations that have been presented by the weakness in the equity markets, leave us more constructive on the opportunities for global equities looking out in to the medium to the long term.

Which markets have a better economic outlook? Which region and industry would Aberdeen raise investment allocation?

The most notable aspect of the world economy was that the economic growth outlook has deteriorated all over the world: a synchronised global slowdown. The most acute slowdown appears to be in countries that had been reliant on exports for growth. Particularly weak GDP reports were posted by Singapore, where the GDP was reported to have fallen by over 16% on an annualised basis in the fourth quarter of 2008, and Japan where growth fell over 12%. Even China, reported sharp falls in both export and import levels of around 25% year on year. The notion that Asia and Emerging Markets could decouple from the problems emanating from the Western world have now been consigned to the bin.

However, in contrast to a significant proportion of Western economies there is more of a cyclical than structural aspect to this down turn for them. More than a decade on from the Asian crisis many of the previously fiscally hampered Asian economies are in a much more healthy position. The problem of the reliance on exports for Asia has been all too clear over the past six months. Many commentators have been suggesting that Asia has sufficient domestic demand to be able to stand on its own two feet economically. The answer to that is not yet. Given that China currently produces 11% more than it consumes, would lead one to believe that Asia as a region, while moving in the right direction, is still some way from that goal. The recent trade data in countries like Singapore and Hong Kong would bear this out. The global slowdown has taken a greater toll on economic activity levels in Asia than most expected. However with a stronger fiscal position in general, Asia would seem well positioned to benefit as global trade levels eventually normalise.