Weakness in peripheral Europe transitory, Skandia tells investors

LONDON | Skandia Investment Group believes equities will go higher in 2012 despite their already record performance in the first quarter. Equities would be set to rally again once profit taking comes to an end, SIG told investors Friday in a note. Analysts pointed out that global equities had their strongest quarter in over 10 years on the back of strong economic data and hopes that the European debt crisis was past its worst point.

SIG CIO James Millard admitted

“Economic data has become less positive while the improvement in the peripheral bond markets appears to have stalled.

“As a result of this a bout of profit taking could take place in the near term. Nonetheless, we think that ongoing economic growth, low interest rates, favourable valuations and an improvement in the euro zone debt crisis will lead to higher equities over the rest of 2012,” said Millard.

Following the sharp rally seen in recent months, SIG revealed it had reduced its equity exposure at the end of March for fear profit takers will take the edge off the market. However, the firm is of the view that this current weakness will be temporary and that equities will strengthen later in the year.

In the firm’s latest monthly asset allocation report, SIG showed strong preference investing in emerging markets and Asia, with particular focus on China. SIG considers that China will avoid a hard landing and that it could loosen monetary policy if it needed to do so while the weak housing market was a result of government intervention which could be reversed. SIG was neutral on Europe and Japan.

Millard said that SIG remained heavily overweight non-government bonds with the corporate sector remaining highly profitable and generating a large amount of cash. He pointed out that the US corporate sector had the highest level of cash as a percentage of total assets than for any time over the past 50 years.

Regarding currencies, Skandia said

“The British pound was the strongest of the world’s largest economies in March. It strengthened on the back of stronger than expected economic data, which suggests that the economy has avoided a second consecutive quarter of negative growth. While interest rates are likely to stay on hold for some time, a further round of quantitative easing is looking less likely.”