With the global stock markets showing some volatility recently and with even some of the most renowned experts at odds about where the United States economy is heading, investors are facing more uncertainty than they have in years.
A company just really getting started here in Cayman after years of success in Bermuda hopes to simplify the complexities of the modern global economy.
BIAS (Cayman) Ltd. is sister company to Bermuda Investment Advisory Services Ltd. – BIAS – established in 1992 to provide independent investment management services.
During its inaugural Quarterly Market Briefing in the Cayman Islands recently, Senior Investment Strategist Robert Pires told clients about seven market themes BIAS favoured in 2007.
Those themes included, among other things, steady US economic growth, strong emerging markets in developing countries, and rising interest rates.
Some analysts would disagree with the idea that interest rates will increase, and indeed, many are predicting interest rates to actually lower over the course of 2007.
But Mr. Pires and the BIAS team think a rise in inflation will drive interest rates up.
‘We think that going forward, inflation will be spurred by two factors; a return to higher oil prices and a global labour shortage which will drive up wages,’ Mr. Pires said.
A graph of oil prices over the past few months shows a reverse head and shoulders trend, which sometimes leads to what is known as a breakout where prices often go as high from the shoulder line as the reverse head is low. If this were to happen in this case, oil prices could once again approach the $70 per barrel level.
Added to factors like global oil growth and demand rising, lower inventories and colder weather in the Northeast, BIAS thinks oil prices are heading up.
Although the BIAS team steers away from predicting specific price levels, it does look at the trend.
‘We always try to get the direction right – that’s how you make money,’ said Mr. Pires.
Taking out energy and food, the core Consumer Price Index still rose a higher than expected 0.3 per cent in January.
‘This confirms our expectations that inflation is building up from other sources aside from oil prices,’ Mr. Pires said. ‘I think it will prove to be primarily labour costs as the year progresses.’
A trend in the labour markets of rising wages and falling unemployment implies that inflationary pressures will remain heightened, another factor in rising interest rates, BIAS believes.
‘Higher income equals to higher personal consumption expenditures going forward,’ Mr. Pires said. Higher consumption with low unemployment in turn would fuel inflation. Rising inflation would then in turn cause interest rates to go up.
‘Our expectation may be delayed to 2008,’ Mr. Pires said. ‘We don’t concern ourselves about dates, but rather direction.
‘We believe our expectations for the direction of inflation and interest rates are right. The undertone of the global economy remains firm… and that higher oil prices and higher wage costs will create higher inflation resulting in higher levels of US interest rates.’
In discussing the emerging global markets at its Quarterly Market Briefing, BIAS said it believes China was its favoured emerging market because of its massive infrastructure build-up and its development into a manufacturing and exporting superpower.
The recent drop in value of Chinese stocks did not change that view.
‘What we saw [at the end of February] is not reflective of economic performance in China,’ Mr. Pires said. ‘[Gross Domestic Product] growth remains strong.
‘Rather Chinese stocks as we noted… in Cayman, and a week and a half earlier in Bermuda, had advanced too far, which led us to believe that near-term, mainland Chinese stocks were at risk despite our long-term view that China should be held in portfolios.’
BIAS offers investors several funds through which to invest, including a Short Duration Investment Fund, a Global Balanced Fund and a Global Equities Fund.
Although its first Quarterly Market Briefing focused on a broader picture of the market and of BIAS itself, future briefings will likely also look more closely at specific market features, Mr. Pires said.
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