Light amid euro gloom
Political divergence among eurozone leaders appears more pronounced than ever, and presents a serious and growing impediment to the restoration of financial and economic stability in the region.
In his recent appraisal of the situation, Bank of England governor Sir Mervyn King speaks for most of us: “There is just enormous uncertainty out there. I have no idea what is going to happen in the euro area”.
In such an environment, the challenge is to control risk without strangling the potential for returns.
In equities, we remain highly selective. Our preference is for the US, where companies are a few steps removed from troubled Europe and benefit from the relatively supportive domestic economy.
Demand for exports and discipline with regard to costs among US companies have helped sustain growth in earnings.
At the same time, falling household debt and improved dynamics in the housing market should encourage the consumer to put a toe in the water, to the benefit of domestic businesses.
Europe, on the other hand, faces bleak prospects for domestic growth, although global exporters are finding relief in overseas markets.
Meanwhile, the heavy dependence of UK exporters on European trading partners leaves them vulnerable although many are tapping emerging markets as alternative sources of growth.
On a number of counts, corporate bonds win over both government bonds and equities. In the current environment of low interest rates, corporate bonds offer compelling yields. At the same time, they represent good value – the differences between their yields and the yields on government bonds are wide compared with where they have been historically.
Within real estate, we prefer UK property. Although languid economic growth may constrain pricing in the near term, yields remain compelling relative to other asset classes.
There are indeed significant challenges ahead. We nonetheless find no shortage of compelling investment opportunities and believe there are ample grounds for optimism.
Bambos Hambi is head of fund of funds management at Standard Life Investments