It is evident that in spite of the nervous attitude of many investors who emphasise the negative effects of debt deleveraging, the economic healing processes are gaining real traction globally.
We are seeing real evidence of a globally synchronised recovery that is more accepted by a wide constituency of investors.
While we have seen an unconvincing rally in most developed market government bonds, it still looks as though equity and bond markets are pricing in two different effects. The former looks to be driven by globally improving growth conditions, while the latter has been driven by concerns about the path to normalisation of interest rates.
We continue to see rotations among asset classes, styles and sectors as investors continue to wrestle with the implications of broadening global growth for asset prices.
Central banks are clearly still accommodative and interest rates should stay low for the foreseeable future. In the US, tapering fears are probably overdone, as sustained growth still requires supportive monetary policy. Housing, consumer confidence and employment numbers continue to improve.
Chinese data is improving and economic growth indicators in Europe continue to surprise on the upside.
For equities, we believe valuations are still attractive in Europe and a number of emerging markets that have substantially underperformed. At stock level, structural growth and selected cyclical stocks are favoured given the improving growth dynamic.
However, risk-taking behaviour is very high and a number of accompanying conditions leave us cautious about the potential for a short-term setback.
In fixed income, with inflation contained and tapering on hold for now, developed government bonds are unlikely to sell off dramatically, but the debate over the path to normalisation has drawn increasing attention and this has placed bonds under growing pressure.
Peripheral bonds look very attractive to yield-hungry investors, but credit markets look expensive in a relative and absolute sense. In emerging markets, pressure on debt markets has eased, but worries persist over countries running current account deficits.
In our opinion, it is becoming clearer we are on a path to economic improvement in nearly all areas. In terms of positioning, our focus is moving toward growth and cyclical equities, as we believe any upside growth surprises will be rewarded, given low valuations and generally negative fund manager positioning.
We are balancing this with exposure to dividend growth strategies that also have lower volatility characteristics. We have a more cautious short-term view given that sentiment towards equities is at an elevated level. Janet Yellen becomes the new chair of the US Federal Reserve in January 2014 and we have round two of the US debt ceiling negotiations. This is likely to be a time of heightened risk to equity markets.
We seem to have reached a significant turning point with most areas of bonds facing strong headwinds. We are focusing attention on areas such as selective US and European distressed credits and European asset-backed securities and loans, where we still see selective value.
Mark Harris is head of multi-asset at City Financial
