The global economy continued to weaken throughout November. Consensus forecasts for global growth are uniformly bearish, with negative growth now expected in the US in 2009. Also earnings growth expectations for 2009 continue to decline, and in November these expectations have fallen from 20% to 13% in the US. Projected 2009 earnings growth in Europe has fallen more substantially.

Global financial authorities are likely to continue their efforts to stimulate their economies, by providing liquidity injections and various fiscal stimuli. Given the continued weak economy, markets are pricing interest rate cuts across the board, with a possible 50 basis point cut by the middle of next year in the US. Falling energy prices (and hence inflation) and continued market turmoil, should also give the Eurozone and UK authorities room to cut rates further. They are expected to fall to 2% and 1.25% within the next 12 months.

Although markets appear to remain fraught with uncertainty heading into 2009, we do see falling inflation, increased government spending, low interest rates, and loosening credit conditions as positive developments. Downward revisions to earnings growth also suggest that a lot of the bad news is already reflected into equity prices, thus making the long-term valuation for equities more compelling.

Given the very uncertain outlook, we continue to recommend that investors keep their portfolio broadly diversified, and inline with allocations that are best suited to meet their long-term investment goals. As the risks to growth still remain to the downside, we continue to have a preference for cash over risky assets in the immediate term.

• US equity fell in November on concerns over earnings forecast declines, weak economic growth, and a change to the TARP program. The current equity earnings yield is attractive but the economic growth risks are still high, and continued bank asset-valuation losses and financial turmoil can hurt lending activities.
• Earnings revisions, on the other hand, have come down and are more in line with a weak growth environment. On a positive note, inflation risks has come down somewhat. Overall, we reiterate our cautious message on equities relative to cash.

• The year-to-date decline of equities in Europe has been steeper than in the US (-49% versus -39%). 2009 earnings growth estimates have also been halved during November to more reasonable levels.
• At forward PE of 8, European equities are attractive. But this is balanced by the high economic growth risks. Thus, we reinforce our defensive message of favouring cash in the short term. We believe European equities will perform in line with peers.

• Given the sharp decline in earnings projections, the forward PE increased to 12 times, a move that diverges from other developed countries. We have a prolonged slowdown as our base scenario and persistent economic difficulties in developed markets can continue to hurt Japan's growth.
• With the Bank of Japan's rate already at a low 0.3%, monetary easing may do little to encourage growth further. So given the valuation and risk balance, we remain neutral on this market relative to its peers.

• The price multiples have fallen to low levels. And despite seemingly high economic growth numbers still, central banks in Asia are cutting their interest rates aggressively in anticipation of slower growth ahead.
• So even with the steep price declines, the increased uncertainty on economic trends allows us to reinforce a defensive message on equities versus cash in this region.

• Economic data continued to weaken broadly across these markets, and growth forecasts were revised down. Valuations are generally attractive, but risks remain from continued slowing economic activities. Therefore, despite attractive valuation we continue to favour cash for the short term given the growth risks. We expect emerging market equities to perform in line with developed markets.

• China shares rebounded and Hong Kong market seemed to have found support in November after hitting a 5-year low in late October. The People's Bank of China cut its one-year benchmark lending and deposit rates aggressively. And the HKMA has taken aggressive steps in injecting liquidity into the interbank market to ensure lower cost of funds to financial institutions. Despite improved sentiment, trading was light with the market lacking general direction.

• USD strength and grave economic growth concerns caused the oil price to fall another 20% in November. Adding to oversupply concerns is fears OPEC may not significantly cut production to support oil price. However, geopolitical tension should provide some support for the oil price and we expect it to trade in the US$40-60 range over the next year.

• Given the extreme low yields, the asset class remains unattractive from a valuation point of view. Plus for the medium term, the outlook for the asset class is clouded by the increase in the issuance of debt to support economic growth. This increase in supply is likely to be a negative for the price of Treasuries, all things being equal. Yet in the short term, the focus on safety and liquidity continues to support US Government bonds and leads us to maintain our neutral stance.

• Similar to US Treasuries, increased debt issuance and unappealing valuations weigh negatively on the medium-term outlook for the asset class. Despite the medium term concerns, the potential for more rate cuts and the flight to safety provide near-term support for the asset class, thus we suggest a neutral stance in the short-term.

• Asian bonds returned 2% in November. All the gains were driven by decline in US yields and the high level of running yield. The continuing increase in credit spreads reflects the deteriorating economic fundamentals as well as continuing investor deleveraging and risk reduction. The environment remains very challenging and despite attractive valuations the longer term view remains neutral.

• High Yield Bond is increasingly attractive from a valuation point of view. In the short term, however, the weak economic growth picture and heightened risk aversion remain a significant concern that leads us to keep a neutral stance.
• Emerging markets have increasingly slowed and government intervention has been necessary to stabilize some major emerging markets. While the weak performance has increased the spread for EM debt, spreads are not at their peak levels from the previous crisis. So given continued growth risks in the emerging markets, and relative to yields in other risky fixed income assets, we are negative on EM debt.

• The USD is at fair value, and given the current weakening economic picture across all developed countries, risks are balanced. In the very short term, currencies can move in a sharp and often short-lived fashion due to short-term capital flow movements. Given the high volatility, we reiterate our neutral view.

Canadian Dollar (CAD) – Suffered From Commodity Price Weakness

• The Canadian dollar suffered its sixth consecutive month of negative returns in November. As concerns grow over the impact of slowing global growth, commodity prices have been weak of late. A prolonged period of commodity price weakness would put downward pressure on the Canadian currency.

Euro (EUR) – Weakening Outlook And ECB Rate Cut Unfavourable To Currency

• Weakness in the Euro was caused by more pessimism on growth and the cut in interest rate by the ECB. The interest rate differential is becoming less of a driver for the EUR/USD. As the US and Eurozone face similar macro problems, risks are balanced. Hence, we maintain a neutral position.

Sterling (GBP) – Risk Policy Initiatives Could Steer Currency To The Downside

• The Bank of England has indicated it is willing to allow the currency and deficit to adjust as much as needed. In the short term, there is risk of further depreciation of the GBP, but from a valuation perspective the currency is broadly at fair value relative to the USD.

Japanese Yen (JPY) – Strong Technical Factors Contrast Weak Economic Outlook

• Risk aversion and unwinding of carry trades moved in favour of the JPY again in November. The JPY is now broadly at fair value relative to the USD. The macro economic picture continues to be weak with the Japanese economy technically in recession.

AUD & NZD – Rate Cut Reduced Attractiveness Of Currencies

• Falling interest rates have reduced the attractiveness of both currencies. Compounding the negative fundamentals has been the fall in commodity prices, which reduces the terms of trade for Australia and New Zealand. Yet, the fall in the currencies already reflects a lot of the negative news and the outlook may not be as bearish as before.