There are signs of growing stress and tension in global economies, the financial system and societies, which are creating many confusing cross currents in financial markets. This is reinforcing the enormous uncertainty over the trend of asset prices and evaluation of risk. As a result, we continue to feel that a period of increasing strain in financial markets is likely and that investors should continue to underweight risk assets, maintain effective diversification and stay with quality stocks that have sound balance sheets and compelling value.
The U.S. remains awash with liquidity against a backdrop of a sub-par economic growth that exhibits many signs of fragility. There is a complex mixture of strengths and weaknesses as the private economy is in the early stages of deleveraging. The public sector has aided this transformation by increasing public sector leverage and monetary expansion at a prodigious rate. The effect has been a levitation of stock prices, stabilization of the housing market and an economic recovery that is largely artificial. The overarching questions are how long fiscal and monetary expansionism can be sustained and what the consequences will be when they are reversed.