Tale of two hemispheres

This brings the overall performance since the beginning of 2009 (both portfolios having been constructed at the end of 2008) to 29.4 per cent and 33.6 per cent respectively, compared to benchmark total returns of 13.4 per cent and 16.2 per cent.

(Portfolios are administered by Barclays and holdings are rounded to the nearest 0.5%)

This is a credible performance, but what of the future? Is a double-dip recession around the corner, or does this latest setback represent a buying opportunity?

Contrasting outlooks

Recent news flow from different parts of the world may at least guide us over the longer-term.

The Chancellor's budget was well received by investors – he played a difficult hand well given the finances he inherited. It came across as fair and was enough for the markets. However, to use his words, the Budget ushers in "an age of austerity."

As with Western economies generally, economic growth will be sluggish at best. Both government and consumer are over-indebted. Interest rates may be low, and quantitative easing may have helped to avoid the worst case scenario, but if the banks are reluctant to lend then demand will remain lacklustre at best.

Add in concerns that the recent drop in US consumer confidence for May contributes to growing evidence of an impending double-dip recession in the US, and concerns that the European banks have been slow to write down bad debts and so are therefore particularly vulnerable to the austerity measures being pushed through by certain governments, and you can understand why investors are nervous.

Yet two recent bits of news from the Far East points to a brighter future for this region. First, news that China is reverting to a 'crawling peg' system for its currency has allowed the yuan to appreciate. Although this is still not a free-floating system, it is good news for a number of reasons.

For a start, US protectionism will suffer a setback as many in Congress had felt China was unfairly sustaining its current-account surplus by refusing to allow its currency to appreciate against the dollar. The facts suggest this is misguided given that when the crawling peg system was last in force between 2005 and 2008, during which time the yuan rose nearly 20 per cent, China’s current account surplus still kept rising - suggesting the Chinese are not attracted by what the US produces. But such a measure will at least reduce tensions.

In addition, inflation will be moderated of because cheaper imports, which should help China achieve a soft landing. But perhaps the big story here is that this move signals an intent to reduce China’s heavy dependence on exports as a means of generating growth, in favour of its potentially huge consumer market. This could be a real fillip to a world economy desperately short of demand.

Meanwhile, another bit of news which did not get much press is that China and Taiwan have recently signed an Economic Co-operation Framework Agreement (ECFA), which should boost trade and investment and reduce tensions between the two countries. China had already recently signed a trade agreement with the 10 members in the Association of South East Asian Nations (Asean), but Taiwan was not included.

The ECFA adds to the attraction of the region. As I pointed out last year (, 11 Dec 2009), the Far East already boasts young populations and high savings ratios. But low interest rates, allied to cash-rich governments investing heavily in infrastructure and social welfare projects, could result in domestic spending increasing significantly.

Conclusion

I shall leave wiser people than me to decide whether we are heading for a double dip recession. For choice I feel comfortable retaining a modestly defensive position relative to the benchmarks for the time being, knowing that gearing in some of the portfolios' investment trusts will enhance returns if markets move up. Consequently, I have made no changes to either portfolio during June.

But what I do believe is that investors must be overweight the Far East over the longer term, and both portfolios are positioned accordingly. Whether you're a young man or an old one, the advice is the same: go east!

Growth portfolio

Income portfolio

John waives his fee for this column in lieu of a donation by the FT Group to charities of his choice.