Investment rules of thumb about supposedly safe asset
classes have been thrown into the air in the aftermath of the 2008 financial
crisis, while emerging market assets are often seen as less risky than their more
established counterparts, a conference in London
heard recently.

But while some of the gloom stemming from the jarring events
of five years ago has not fully dissipated – as demonstrated by continued
worries about the eurozone’s fiscal problems – the picture is far from bleak,
delegates, attending the Breakfast Briefing entitled The “New Normal” Vs The “Old
Normal”, were told. The event was organised by ClearView Financial Media,
publisher of this website, in association with the World Gold Council.

Among the key issues facing investors and their advisors,
delegates heard, is exactly how, or when, central banks such as the US Federal
Reserve decide to reduce the expansion of the money supply, otherwise known as
quantitative easing, if economic signs suggest a sustained recovery is under way.

Willem Sels, head of investment strategy and chair of the
investment committee of HSBC Private Bank (UK), said the outlook for the world
economy is “just about strong enough” to be constructive for global equity
markets. “We don’t want the economy to be too strong because monetary policy
will be then less supportive,” he said.

As for bonds, clients want some “cash-plus” exposure, and
are holding short-dated paper. “We like credit risk but don’t want duration
risk,” Sels said, noting that many of the effects of QE are now priced into
bond yields. On balance, he said, QE is now more supportive to
equities than bonds.

Sels pointed out that one issue for clients at home in the UK is the
seemingly incongruous mix of a strong stock market and a relatively sluggish
economy. “The main question from clients is why the equity market is rallying
when the UK
economy is not doing very well,” he said.

In the US,
however, the picture was less ambiguous, despite some continuing concerns, he
said. “The US
economy now has a lot of positive forces behind it,” he said, citing
developments such as shale gas exploitation, and the drastic actions taken to
recapitalise and support many banks, among others. The plight of the US economy is
crucial as the value of the country’s stock market accounts for half of the
total market capital of the world’s stock markets.

There have been some small improvements in the eurozone and
some capital flight from the single currency bloc has slowed or even stopped,
Sels said.

There are risks in the short term to emerging markets, Sels
said, although “the longer term remains quite constructive. There are
questions about how China
is going to rebalance its model”.

“We believe that you need alternative assets to diversify
your portfolio,” he said, referring to hedge funds, private equity and
property, among others. “You don’t want to go too far up the risk spectrum to
get yield,” he added.