With equity markets at, or close to, record highs and fixed income yields at, or close to, record lows it does appear there is little value remaining in most major asset classes.
Even a bond manager we spoke to earlier this month highlighted the very limited value in their asset class and suggested equities as a less bad alternative.
Quantitative easing is moving all asset prices higher and we should bear in mind this policy is continuing at a very significant pace in the eurozone and Japan.
These measures, alongside loose monetary policies elsewhere, are forcing investors higher up the risk spectrum in their search for returns and yield.
This is not a normal backdrop for investors but nor will it end any time soon. This is because of the key influence of central bank policies in markets and the fact these measures will need to remain in place if governments’ inflation targets are to be met.
We are becoming more cautious overall but can still see relative value in certain regions and can even find some value in areas of the fixed income market.
That said, we are happy to remain very underweight in bonds and are selective in our regional equity allocations.
We continue to be overweight Japan, Asia and Europe, and underweight the USA and emerging markets. We are also underweight the UK, but we are likely to add following the outcome of the general election.
Looking at China, its stockmarket continues to climb, with it up just under 40 per cent so far this year. A couple of weeks ago sentiment was boosted by a 1 per cent cut in the reserve rate requirement (RRR), which should allow banks to lend more and, in theory, stimulate growth.
This was the biggest single cut to the RRR since the financial crisis in 2008 and points to an increased urgency from the authorities to boost growth.
It also represents a return to previous policies that aimed to stimulate credit-fuelled growth. But the issue this time round is that credit is not growing significantly and the equity market has decoupled from credit growth as well as economic fundamentals.
These bubbles normally end badly but in the short term the market will likely move higher.
More broadly, recent economic data has been mixed. Flash purchasing managers’ index (PMI) data for the USA, Japan and China all missed expectations; the eurozone PMI data was better, though both German and French data were weaker than anticipated.
In the US, recent existing homes sales data was strong but new home sales missed expectations. Meanwhile, US consumer sentiment was better than expected.
In corporate news, with the first quarter US earnings season well underway, we are seeing, as expected, most companies beating headline earnings thanks to much lower expectations.
But around half of the companies that have reported so far have missed estimates on revenues, with many blaming the strong dollar.
While share buybacks and mergers and acquisitions remain supportive for the US stockmarket – which is very close to record highs once again – we remain concerned companies will struggle to maintain earnings given margins being squeezed by wage increases and a strong dollar.
Rob Burdett is co-head of multi-manager at F&C Investments
