Discretionaries: Predictions for the rest of 2013

Guy Foster, head of portfolio strategy, Brewin Dolphin

The FTSE

Prospects for UK equities remain positive, although volatility is likely to be more pronounced as quantitative easing is replaced by the realities of market forces. The improving economic environment in the US and a stabilising eurozone are likely to underpin the prospects for UK shares. An economic recovery in the UK may be unimportant for FTSE revenues, but it will mean that any rise in interest rates and gilt yields remains modest and the valuation gulf between equities and other assets remains attractive.

Japan

Japanese equities are seen as benefiting from ‘Abenomics’. Significantly this would be through the weaker currency and partly the result of greater domestic demand. Currency gains from the yen’s decline will lead to higher profits from overseas. Domestic Japanese firms, however, are also expected to take market share, pass on higher wages and suffer higher import costs. There are signs of success in terms of trade and wages recovering, but that would logically have been achieved at the expense of margins.

Europe/eurozone

Positive revisions to purchasing managers’ indices have echoed other data suggesting stability is returning to Europe – even as it remains mired in an 18-month recession. Mario Draghi’s famous ‘whatever it takes’ speech has continued to apply powerful monetary stimulus to the eurozone, feeding through into lower sovereign, covered bond and corporate rates. The brighter monetary environment is encouraging, although the long-term prospects for the region remain underwhelming and tail risks remain.

S&P 500/US

We remain extremely positive on the US. The economy is creating significant wealth as a result of the housing market recovery and rising employment. Previous drags on growth have included high inflation for non-discretionary spending – principally higher food and energy prices – but these have actually fallen in the past 12 months. Cheap energy is facilitating a manufacturing renaissance that should be positive for the dollar, for US companies, and eventually feed into higher wages.

Property

We have recently added to commercial property, as we believe the improvement in the UK economy is starting to feed through into higher demand for property nationwide. Current rental reviews ought to reflect the more optimistic economic tone and the previous very depressed rents are set to come up for review in the near future as we approach the five-year anniversary of the financial crisis and associated property crash.

Bond yields

We see bond yields rising, but we expect technical demand from pension funds in the UK and macro-prudential regulation in the US to provide structural support for fixed interest. In the US, in particular, the Federal Reserve can accept somewhat higher yields but a so-called normalisation would actually threaten the embryonic property recovery, so the process of adjustment will be managed.

Thomas Becket, Psigma Investment Management

The FTSE

Our view is that the summer volatility will continue through to the second half of 2013, but an improving global economy will help the FTSE to 6,800 and cap off a fine start to the year. Investors generally seem to be warming towards equities and we believe this tailwind should drive positive returns.

Japan

I think at this juncture one has to employ an educated guess with Japan, rather than genuine foresight, as the market is fluctuating wildly and moving around on liquidity promises rather than fundamentals. However, we have long argued that Japanese companies are cheap and believe the market could hit 16,000 by year end.

Europe/eurozone

Europe is healing, as evidenced by the latest purchasing managers’ index statistics. Equity markets in Europe have already hinted that things were about to get better and we are optimistic for the rest of 2013 and 2014. Our view is that the eurozone will grow 2 per cent in 2014 and that markets underestimate this.

S&P 500/US

We get worried on hugely consensual trades, such as the US. Headlines such as ‘The US is the new emerging market’ also cause us great nerves. US equities still merit a place in portfolios, but we would reduce [there] and fund better value opportunities in Europe, emerging markets and Japan. Solid economic fundamentals are already reflected in market valuations.

Property

We would continue to urge retail investors to avoid UK commercial property. Yields on unit trusts are not attractive and the charges are onerous. There are some parts of the UK market that will see growth, but they are specialist and hard to invest in. Better opportunities remain elsewhere in global financial markets.

Bond yields

Just as we are hitting the top end of the recent range for global government bond yields, this is the big question for the remainder of 2013. We are less bearish than some and less bullish than others. Indeed, we think the balanced argument will see bond yields continue to be range bound in the coming months. But, importantly, we stand by our view that we will not get back to the lows of the previous summer and bond markets have ‘rolled over’.

Justin Urquhart Stewart, Seven Investment Management

The FTSE

We view this index as a proxy for global growth – only 20 per cent of the sales of FTSE companies are derived from the UK. The outlook for emerging markets, which generate the majority of year-to-year global growth, is murky. In China the outlook is... goodness knows what. At least growth is likely to be positive, but it is slow and slowing. Even if a UK economic recovery comes, it will be tortuously slow. Positive but dull.

Japan

Unfortunately the recent volatility has tarnished the story and it is likely to be a very bumpy [ride]. Even if the returns come now, they won’t look that good on a risk-adjusted basis. Only substantial earnings growth could deliver the gratification that Japanese equity markets need, but that doesn’t leave much room for upside surprises.

Europe/eurozone

Europe has among the most interesting equity markets with the end of austerity in the offing and innovative stimulus policies being discussed. No doubt few investors will have high hopes of seeing significant policy actions. But we like cheap assets and many positive developments lurk beneath the surface here, whereas the negatives are widely appreciated. Can governments revert to growth-orientated policies but keep reforms on track?

S&P 500/US

Not going anywhere until investors get over quantitative easing (QE), which implies increasing volatility and not much return. It is a shame because QE has done its job and the economy is back to being a relatively dynamic leader among developed markets. It is likely to be the first economy to see the return of growth-related capital investment by companies but, while being good for macroeconomic growth and theoretically good for equity valuations, it is likely to dampen margins in the short term.

Property

Global Reits [real estate investment trusts] have dipped on fears of a rise in interest rates. Compared with an average yield of 3.5 per cent on global Reits, the 1.4 per cent yield that was being offered on the 10-year UK gilt in the middle of last year did not look that exciting. Since then the UK gilt yield and yields on US Treasuries have been rising and the yield on the 10-year UK gilt is now roughly 2 per cent and the position has changed.

Bond yields

Bond yields have started to normalise with a vengeance but it was highly unlikely that it was ever going to be a controlled process. The central banks cannot – and will not want to – eliminate bond market volatility entirely. Bond volatility can unsettle other asset markets. We saw this in Japan, where wobbles in Japanese government bonds preceded wobbles in equities. This is likely to be only a temporary blip before bond investments head into those other asset classes.