The outlook for the 3rd quarter

I was optimistic about the durability and strength of the global economic recovery at the beginning of the year and I retained that optimism at the beginning of the 2nd quarter. Now I am much less optimistic for which I blame Europe. Too many European banks are effectively bust and the authorities are lothe to do anything about it. The upcoming publication of the stress tests for the banks should make interesting reading. Greece should not be part of the eurozone, as it refuses to abide by the rules. Germany macro policy and her political will is deflationary. Europeans are determined to shoot themselves in the feet. As for the rest of the world, the extent of tightening in China is an issue and bad news for commodity producers. But I think the Chinese authorities are handling the situation well (in contrast to the Europeans). Generally, there are concerns about the durability of the economic recovery, as companies sit on cash and employment markets remain in a dreadful state throughout the developed world. But the recovery is not being driven by the developed world but by the developing world, and the emphasis of that growth is shifting from exports to consumption.
Equity markets have weakened by about 15% in the second quarter, after rising by 70% from the nadir of the bear market in March 2009. The current sell-off is providing buying opportunities for the themes that have dominated the recovery – namely, emerging market growth and exporting to these markets. Infrastructure and health are other themes. I would be wary of sectors dependent on growth in the developed market, e.g. consumption or anything to do with employment or government spending.