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Tim Bond: stranded China assets could be a hazard

by Dylan Lobo on Apr 09, 2014 at 07:48

'If unemployment continues to fall at its current pace there's a risk wage inflation picks up in response to this decline and there's a risk that this cycle is not matched in productivity growth. The previous two cycles you had very strong productivity growth, which has kept a lid on overall inflationary pressures.'

Bond also points out investment from the corporate sector could be higher than it has been in previous years, increasing the inflation threat.

For this reason he has kept his exposure to the US stockmarket marginal.  

'There's some risk of the strong growth coming through of not being as good for the stockmarket as one might expect.'

Europe surge

One of the biggest convictions in the Odyssey fund is Europe equities, which had a net exposure of 43.5% as at the end of February. 

Bond's quant analysis suggests eurozone growth could rise to around 2.8% on annualised basis by the fourth quarter, much higher than expectations.

He believes this growth will be partly powered by the slowdown in the write down of bad bank loans and deleveraging.  

'The write off of bad loans is going to slow. We think a lot of these were front-loaded last year to get inside the cut-off point for the ECB inspection.

'Our analysis of business and loan write off cycles in other economies tells us they are more or less coincidental to things like house price inflation, unemployment and GDP and all of those things in every economy in Europe have turned in a manner to tell you bank write offs are going to slow,' Bond said.  

'That should feed into net income as write offs, which have been roughly a third of operating costs, normalise again. We are also expecting a pick up in lending, so you would also expect income to rise from that source.'

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