InvestmentsSep 15 2014

Global opportunities: where to look

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As we look towards the final quarter of the year, after months of macroeconomic uncertainty and geopolitical turmoil, Investment Adviser asks global equity managers what their views are on the main investment regions.

Michael Hunt, managing director of global equity manager VAM Funds

UK

We expect challenges to continue for the UK. The Bank of England’s policies are not truly well aligned with government policies. We believe continental economic stagnation will continue while the UK is probably stuck in short periodic cycles driven more by policy intervention than momentum in underlying fundamentals.

US

We see moderate economic growth continuing but do not anticipate significant further acceleration in activity. We look forward to the mid-term elections removing uncertainty. Disinflationary pressures should support expectations that the Federal Reserve will be slow to raise rates. Consequently, we expect investors to be rewarded by true growth companies and companies allocating capital most efficiently – toward large share buybacks or highly accretive brownfield expansion and bolt-on acquisitions.

Europe

Many economic and company indicators are moving two steps forward and one-and-a-half steps back. The equity markets will likely retain high interest rate sensitivity. We believe investors will be most attracted to companies offering good medium-term earnings visibility, fortress balance sheets that can be re-levered even in the current environment, and those in sectors undergoing positive structural change.

Asia Pacific including Japan

Our outlook for Japan is dependent on government action. The positive effects from 2012-13 yen weakening are waning. If additional policies are announced, Japan could be one of the best-performing equity markets in the second half of 2014. For Hong Kong and Singapore, we will witness a transformational event in October, with a government-sanctioned connection between the Hong Kong and mainland markets. Expectations are for mainland investors to chase ‘new economy’ stocks in Hong Kong.

Emerging markets/China

We expect second-half stock returns to be more related to corporate and economic fundamentals. Brazil has a difficult road ahead as GDP is disappointing for the third year in a row, but will be influenced by presidential elections. Mexico should begin to accelerate as it moves past difficult fiscal reforms. Investors must be very selective in the Eastern Europe, Middle East and Africa region due to risk from Russia-Ukraine and economic stagnation coupled with the commodities weakness that challenges South Africa.

Dylan Ball, portfolio manager and research analyst, Templeton Global Equity Group

UK

I think the monetary policy put forward in the aftermath of the global financial crisis has proved to be the right one recently. The fact that the UK economy recovered before continental Europe and has grown from strength to strength, certainly in the last couple of quarters, is a real indication that we are out of recession and processing to normalised growth. If 60 per cent of UK exports are to continental Europe, I think it’s credit to the economy that this country’s economic cycle can race ahead of its trading partner.

US

It looks likely that the US will have to start to raise interest rates. The fact that GDP growth was 4 per cent in the second quarter is a very strong statement. There is a recovery there and it’s not yet reflected in the bond market, so bond yields and interest rates will inevitably have to rise. Cashflow has been used by management to buy back stock, which is leading to earnings growth – but we don’t have any revenue growth, we don’t have any top-line growth coming through in the order we would have expected.

Europe

This is the shallowest recovery in post-war history. There’s going to be volatility in this recovery. We came very far, very fast in 2013 and the second part of 2012, when the European Union emerged out of its recessionary period. It’s consolidating right now. A lot of the lead indicators, be it general confidence or PMIs, have tailed off and that’s only to be expected. The recovery is not going to be in a straight line. There will be volatility and that is exactly what we’re seeing.

Asia Pacific including Japan

The top-down situation with ‘Abenomics’ is predicated on the devaluation of the yen and trying to bring cash off the sidelines and raise returns. If that was an export-driven economy like it used to be in the 1990s and early 2000s, then that would work. Whether Abenomics works remains to be seen but whatever happens, we are likely to see a devaluation of the currency, which will benefit the exporters. Japan’s neither been negative or positive for our performance. We see corporate governance improvements coming through but, by and large, we remain underweight.

Emerging markets/China

There is a transition period as China transitions out of old, heavy industry-based growth, through to a more consumer urbanised economy and that transition period is going to see some volatility in the level of GDP growth. What we’re seeing is China coming off the high-single-digit GDP growth levels down to around 7 per cent growth and [that] is still very good. So there’s slowing growth, but there is still very strong growth in China.

Jamie Cumming, senior investment manager on the global equities team, Aberdeen Asset Management

UK

The UK stock market reaching a 14-year high may be a sign for celebration in certain quarters, but we would be more cautious. While headline figures suggest the economy is recovering nicely, underlying data remains mixed.

US

Recent stockmarket gains have outpaced corporate earnings growth, therefore valuation expansion has continued to be the main driver of performance. While high, valuations are not prohibitive – however, to justify these, the market now needs to be directed by higher-quality earnings and cashflow growth, as opposed to the support provided over the last few years by share buybacks.

Europe

European stock markets are likely to remain subject to further volatility given the fragile state of Europe’s economies. While Germany should continue to expand, France appears to be stalling. Investors are also jittery as the region’s recovery is still weak, especially in the peripheral economies. This is leading to ever-increasing pressure on the ECB to launch quantitative easing.

Asia Pacific including Japan

The Bank of Japan’s most recent assessment of the economy suggests a moderate improvement in consumption. But the quality of the recovery is mixed: wages, a key proxy of consumer spending, is seeing muted growth, which could hurt consumption in the longer term. At the corporate level, it has been encouraging to see the administration’s push for better corporate governance and drive to incentivise companies to improve shareholder returns. This has been reflected in the formation of the JPX-Nikkei 400 index and the introduction of a Stewardship Code.

Emerging markets/China

After a difficult 2013, emerging market equities are on a firmer footing. Current account deficits of several developing economies deemed vulnerable to shifts in global liquidity have also narrowed – albeit at differing speeds – paving the way for a cyclical rebound. In addition, prospects for reform look bright and corporate fundamentals remain attractive. However, volatility may resurface in the face of patchy global economic growth, heightened political tension and the actions of the US Federal Reserve and ECB.

Nyree Stewart is features editor and Ellie Duncan is deputy features editor at Investment Adviser