Debt and taxes only sure things for 21st century

Louisa Bojesen
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While many market participants have enjoyed an awesome rally through 2009, the growing budget deficits are going to be hard to escape. In the US, there is hesitation to move away from a strong dollar policy rhetoric. Of course there has to be hesitation as the dollar still is the world’s currency reserve. On the other hand in the UK, Bank of England Governor, Mervyn King caused the pound further pain by stating that a weak pound was helping rebalance the UK economy.

Andy Hartwill, market strategist from Quasar says that King is only pointing out the obvious and that the only thing that is sure in the 21st century is debt and taxes. Hartwill says that the Bank of England can’t hike interest rates any time soon, and this is why sterling will continue to suffer against the euro. While the risk premium in equities has come down from March, trend growth will be lower than what it was for the past two decades as we don’t have the capacity to ramp up debt to fuel a new rally. Hartwill thinks that we could be pretty close to fair value on the FTSE 100 at the moment, but that a 15 per cent swing to either side of the level we are at now is realistic.

Trying to pick out investment themes in the current market is difficult. Paul Kavanagh, at Killik Capital, thinks the outsourcing sector will pull through a difficult environment in a more protected manner. He names outsourcing group Capita as a company that could do well. When you look at the sheer size of the government’s problem in dealing with a public sector that has become too big, the solution lies in decent outsourcing and expertise. Another area that Kavanagh still likes is basic resources. It may seem exaggerated that miner Kazakhmys is up around 360 per cent since the beginning of the year, but Kavanagh thinks businesses set to benefit from macro trends, like continued demand from Asia, will have a more traditional recovery. The miners are included in this pot. Regardless of how much recovery we already have seen.

Louisa Bojesen is a presenter on Squawk Box Europe each weekday morning on CNBC.