Review

Anne Richards, Chief Investment Officer
Aberdeen Asset Management

It does not seem that long ago that all was doom and despondency. Since their March lows, equity markets around the world have rallied strongly as investors identified nascent signs of economic recovery.

While there are signs of economic improvement with news of the Eurozone, Japan and the US moving out of recession, the pendulum has swung too far and too fast to the other extreme, with markets now apparently discounting continuing strong economic recovery. We may not revisit the distressed stock market levels seen towards the end of 2008 and the beginning of this year, but some significant problems have yet to be resolved. For instance, the issue for western governments, particularly the US and the UK, is whether they have credible plans to get back anywhere near to balanced budgets and how they will make inroads into the excessive levels of debts that they are still accumulating.

The structural story for emerging markets has been well documented. Hopes of a complete decoupling were dashed in 2008 although these areas have recovered more strongly and more quickly than developed markets in 2009. To offset the ongoing de-leveraging process in the West, there will be a requirement for a number of the larger emerging economies to increase levels of consumption, to make up for much lower consumption in the West. This will, however, involve quite a radical structural change in the emerging world. Whether these countries have sufficient institutions in place to able to effect this change is an open question. However this transition is effected, it is unlikely to be a smooth transition.

While mindful of how far share prices have risen and of the problems ahead, we continue to believe equities remain attractive for those investors with long-term time horizons. Central banks and governments are focused on delivering a sustained recovery while companies are positioning themselves to ensure they weather the continued uncertain economic environment and come out the other side stronger.

Finally, the dividend yields available on many shares, not only of UK companies, are compelling compared to the interest rates offered by saving accounts.