We think it is time for investors to dip their toes in the water and begin to re-engage in measured and careful risk-taking. Prospects for avoiding either a double-dip recession or a catastrophe surrounding the euro area debt crisis have improved somewhat over the past couple of months.

Moreover, these risks had become so pronounced that investors have taken very cautious positions, suggesting that any further reduction in these risks should produce more than the usual upside response in risky asset prices. We favour assets that have a significant yield, low leverage, and minimal exposure to the euro area.

To be sure, the risks to markets are not dismissed easily, and we do not believe that the upside for risky assets in general is anywhere near as great as it was in March 2009, when we issued our “Green shoots have arrived” report. At that time, the biggest recession since the Great Depression was ending, and market valuations were at rock bottom. Although we believe a double-dip recession and a disaster scenario for the euro area will be avoided, there are significant headwinds to growth both in the developed and the emerging market countries, and the solution to the euro area debt crisis will be bumpy and difficult. Bank deleveraging, political tensions in the Middle East and North Africa, large fiscal deficits in the developed world, slower growth and higher inflation in the emerging markets, political uncertainty in the US and China, regulatory uncertainty and negative demographics all combine to suggest that returns over the next few years will be lower than in the past few.


source: BarCap