Global Macro Report

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As we forge ahead into this new decade, one cannot but help look back at the previous one as an ever increas-ingly perplexing and unpredictable period of time. It, however, did pro-vide us with a multitude of lessons that will help us navigate the many obsta-cles that line the future path of the global economy.

One of those lessons is that market risk is not some contrived economic doomsday theory that happens once in a thousand years. It’s real, it’s out there and does not exist within a vac-uum. Every investment opportunity should be assessed in concert with its potential related risks. Moreover, every diversified portfolio should be constructed and managed with those risks as the focal point of its strategy.

So, where do investors believe the future market risks lie? What is the probability of these risks coming to fruition? And what effect will it have on the portfolio overall? Is it in Greece’s exploding public sector debt? US commercial real estate? US Treasuries? Credit Default Swaps? Healthcare stocks? Gold? The truth is that these are only some of the poten-tial risks, all with varying degrees of possibility and potential impact on the market. This is something we at Peak Financial monitor closely when we allocate asset classes and investments to our model portfolios.

In terms of future opportunities, we saw the tail end of last decade de-fined by what some pundits like to call the “recovery trade.” Investors were able to take advantage of deeply discounted prices in many investment securities. As cash on the sidelines flowed back into the market, it conse-quently drove prices up from their rock-bottom levels to a more reasonable range or what some like to call a “reversion to the mean.” Currently, we are in the post-recovery trade phase of the market and opportunities now lie less in mispriced securities, and more in asset classes with strong growth potential and even stronger balance sheets.

The health of the capital markets is affected tremendously by the condi-tion of liquidity and the availability of credit. This became a chief concern in 2008’s financial crisis as the founda-tion of the banking industry and the credit markets’ overall ability to func-tion began to deteriorate. The fear of a credit collapse abated as govern-mental entities (not without contro-versy) stepped in and provided much needed liquidity to prevent the markets from screeching to a halt. Consequently, the credit markets have made a strong rebound as cost of capital remains low and credit remains relatively available. The question, however, when looking for-ward is how will the market react as many governments begin to slowly retrench from their liquidity meas-ures?

Global monetary policy will be extremely important in 2010. The world will be watching the recently confirmed US Fed Chairman Ben Bernanke with a magnifying glass as the Fed is faced with many globally-impactful decisions like short-term lending rates and the future of quan-titative easing programs (less visible in the public’s eyes but of equal im-portance). We (and most of the mar-ket) anticipate global interest rates to rise modestly in 2010 and other monetary tightening measures as inflation concerns begin to surface.

In terms of fiscal policy, there are looming risks in rising public sector debt levels particularly within US, Europe and parts of Latin America. Greece, Spain, Ireland and the UK are countries we focus on as being most at risk of being downgraded or defaulting (albeit that is relatively far-fetched). Future tax rates also remain unknown, unpredictable and will continue to be a burden on busi-ness and investment conditions.

We do not envision inflation to be a risk in 2010 as inflationary expec-tations remain low and wage growth/pricing power continue to be subdued by lower growth rates. De-flation, particularly in Japan will be something that will be more destruc-tive and more of a threat in the near-term.

The natural resource picture is al-ways a difficult one to predict, par-ticularly in the short-run. The world still has found no answer to the ever increasing commodity demand of the developing world particularly in en-ergy (oil) and agriculture-related products. There is a potential bubble in gold as it is the one commodity that has no functional use (unlike oil, corn, wheat etc.), but acts mainly as an alternative to currency exposure.

We expect currency appreciation will most likely occur in the emerging markets and those countries with high commodity supplies. We remain bull-ish on the US dollar and expect that in 2010 it will continue its apprecia-tion that it has been experiencing since the fourth quarter. We are bearish on the Euro and Yen in 2010.

Overall, we see global prospects as mixed to positive. Financial stabil-ity and credit conditions continue to improve, but the value trade disap-peared due to the 2009 market run-up. Global unemployment and other potential obstacles may hinder the markets’ drive forward, but overall confidence in the future has returned from its nadir experienced in the beginning of 2009. We are posi-tioning our assets with an expectation of a near-term sideways market.