Tuesday 21st February 2006
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He says that after two years of very good returns from international shares there is a need to manage expectations of future returns down.
"We've been through the best of a golden period," he says. "2004 and 2005 were exceptional years. Going forward, expect returns to be more subdued and much closer to long-run expectations."
Garratt says market returns are likely to be in the low teens on a gross basis and investors and advisers should look to actively managed funds to generate some additional return.
"Lower return environment implies alpha generation is more critical," he says.
While an index approach would have served investors well in the past couple of years, active management is needed now to reduce exposure to under-performing stocks.
His view on the markets is that the economic environment is "relatively benign" and hot and cold patches persist.
The key trend is that there is a good deal of convergence in economic activity. Europe and Japan continue to improve while the United States is declining.
"China is still very sound," he says.
Another area of interest is what is happening in the commodities markets. Garratt says that the boom has peaked.
Gold has continued to rise on the back of a number of Asian economies using it as an alternative from US bonds, for their foreign exchange reserves.
As for oil he says the price settling down.
When asked what the biggest risks were to the international markets, Garratt firstly ruled out many of the usual suspects such as geo-political issues (already priced into markets), inflation (can't see any coming), commodity price shocks etc.
Rather the biggest risk, in his view, is probably the twin-deficits in the United States. He says if these aren't addressed and brought under control, markets could get "spooked: and the US dollar could "fall sharply and quickly."
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