The biggest talking point at present is the discussion amongst the world’s biggest economies as to how best to address the issues affecting the global economy right now. Most western economies (and Japan) have a deficit to negotiate which involves public spending exceeding tax receipts. The difference has to be made up in borrowing and, as everybody is aware, borrowing is hitting record levels in pretty well all developed economies right now.

Some of the world’s G20 leaders believe the best way to approach this is to cut back on public spending and raise taxation to narrow the deficit. These “deficit hawks” include our own coalition Government but are probably led by the German Government. On the other side of the argument, the Keynesian followers believe that such a policy is likely to restrict growth in the economy going forward and, as such, will dampen tax receipts and increase spending on benefits.  This means economies, such as America, are treading less heavily on the brakes at this time.

In reality, this is just a timing issue. Everybody accepts that there will have to be cuts in public spending and increases in taxes and it is just a question of how quickly this is engineered. The recent G20 meeting attempts to get some consensus with lines converging in 2013 but a good deal will depend on how robust world growth turns out to be.

The good news is that emerging economies and the far east are likely to contribute substantially to this figure over the next few years. It is thought that an economy the size of United States will be created every 7 years by the growth in these areas and this gives a great opportunity to companies trading in these areas to improve profitability. These companies do not necessarily have to be quoted in emerging markets to benefit in this fashion and, indeed, there is a theme being played at present which suggests that many global leading brands, generally quoted in Frankfurt, London, New York or Tokyo, are likely to benefit most from the scenario outlined. This implies a global strategy which is less reliant on exposure to different stockmarkets as to a concern about the trading geography of specific companies and efforts are made in our portfolios to purchase larger capitalised stocks which should benefit in this way.

Clearly, there are some instances where some country specific issues are relevant but, even in places like Spain and Greece, there are certain fund managers suggesting there are opportunities right now although it is important to be discerning in stock selection.

Fixed interest markets are concerned that Governments will have to borrow more money over the next few years and this puts pressure on Government Securities. Corporate Bonds are priced off the equivalent Government Security and so investment grade paper may also be under a little bit of pressure. Higher yielding bonds will be less affected, if not entirely immune from this effect, but will benefit as world economies improve and credit ratings get better. This means some high yielding paper will do well and there is probably a “sweet” spot represented by a mix of investment grade and high yielding paper in the strategic bond sector. This area could do well if stock selection is good.

Property still remains under the microscope somewhat and, whilst one or two offices are pushing a story in this sector, it is felt here at Greyfriars that the weak economy, public sending cuts and tax rises will all prove negative for the sector and we prefer to watch from a distance at present.