In such an interesting economic environment Investment Adviser asked the experts to provide their outlook for the two main asset classes.
Simon Brett, chief investment officer, Parmenion Investment Management
Equities
For the US and UK, the recovery is proceeding and we are near recouping all the growth that had been destroyed since the financial crisis of 2008. Unemployment has steadily come down in both countries and there is much talk of the first rise in interest rates. Stockmarkets may see this as positive, as both central banks want the recovery to be fully established before they make any moves. Across the Channel, we remain positive on European markets. Divorce the problems of the eurozone from the stockmarkets and there are some first rate European companies in which to invest. European valuations are lower than in the US and UK, which also adds to their attraction. Japan continues to be a bit of a wild card, but we remain on the optimistic side that Abenomics will work to reignite their stock market. More caution is required for emerging markets. The past year has demonstrated how fickle cash can be, with many investors moving monies to more developed markets.
Fixed income
Is the 30-year bull market in bonds over? At some stage quantitative easing (QE) will end and interest rates will ‘normalise’. The intriguing question is what will this normal level be? To mitigate some of the effects of rising interest rates we prefer short-dated gilts and bonds, where the prices will be less affected by rate rises. And what of index-linked? Expectations of rising inflation as a result of QE has not occurred, indeed inflation is now below the 2 per cent level in the UK. However, inflation will help governments inflate away their debt and therefore we remain positive on index-linked for the longer term.
Richard Philbin, chief investment officer, Harwood Multi Manager:
Equities:
Returns from any asset always depend on two things. An entry price and an exit price. As time progresses, the difference between the two should expand to take into consideration variables such as economic growth, dividends, inflation and so on. Taking the price/earnings ratio as a guide, the FTSE 100 presently is on 13.5x and the FTSE 250 registers 19.1x. Is there a better argument for UK large-cap stocks? Especially considering a dividend yield of 3.54 per cent versus 2.53 per cent as well. On a 13.5x p/e, large-cap equities do not look stretched.
Fixed income:
When considering fixed income investing, the enemy is inflation and interest rates. Interest rates, globally, are not going up anytime soon. The US is likely to be the first mover, but will not rise until a good while after QE ends, which is not likely this year. Gilts do not appeal – yields on the 10-year market stand at an unattractive 2.93 per cent. If held to maturity you would suffer capital loss – taking inflation into account over the next decade.
Hector Kilpatrick, chief investment officer, Cornelian Asset Management:
Equities:
In spite of the Citigroup economic surprise indices indicating a significant loss of momentum in most major economies, there is much to be positive about. Vacancy rates in the UK and US are surging ahead. Truck and car sales are strong and manufacturing PMI surveys remain robust. Furthermore, mergers and acquisition activity has started to accelerate suggesting that company management teams are more confident. We expect better capital expenditure numbers to follow. We are less sanguine on emerging markets and China, in particular, where we see a multi-year work out of bad loans hampering growth.
Fixed income:
We remain wary of long-dated gilts and investment-grade debt, as we see interest rate risk dominating the outlook. We are happier in shorter duration high yield debt as we believe credit risk is offering value. While we were early investors in floating rate note collectives, we are becoming increasingly concerned about the predominance of covenant light issues in the US. While we do not believe, as yet, that the risks outweigh the rewards at the portfolio level, it would be disappointing if we felt obliged to sell these investments prior to proof of concept.
Charles MacKinnon, chief investment officer, Thurleigh Investment Managers
Equities:
The world is slowly recovering, and while most of the growth is in emerging markets, we feel those markets need to have a period of consolidation following the Chinese boom of the past five years. Globally, the markets’ ability to shrug off various events, such as Janet Yellen being installed as the Fed chief or Putin’s annexation of Crimea, tells us that we are in one of those nice, but dangerous periods when momentum is likely to drive prices higher. That said, the exuberance of 2013 has clearly been tempered, and we continue to act on the assumption that a correction could come at any time. The various measures put in place to stabilise the world economy are slowly being lifted, but as long as global growth remains positive, we think developed market equities will provide the best return.
Fixed income:
We expect fixed income markets will continue to provide very low, but positive, total returns. Central banks have started reducing their suppression of interest rates, and the Fed is paring back its bond purchases. As we see inflation starting to become apparent, even at very low levels, we expect bond prices to become more volatile. We are initiating a small position in government bonds. The spread between government and corporate bonds is so narrow that we are getting useful extra downside protection for relatively little opportunity cost. We would like to initiate an exposure to index-linked bonds and a period of volatility would be the best time to do so.
Chris Mayo, investment director, Wellian Investment Solutions:
Equities:
In spite of a period of underperformance in the past few years and short-term headwinds ahead, emerging market equities could now offer a good buying opportunity for the long term. At a time when investors have many concerns on the outlook for the region, valuations are on an historic basis very low meaning they are now looking attractive to buy, particularly for higher yielding emerging market equities. As cyclical economies, when economic growth returns to the regions this will have a positive effect on long-term returns.
Fixed income:
Within fixed income, we remain negative over developed market sovereign debt with the 10-year yield on UK Gilts and US Treasuries offering little value at current levels. With the expectation of interest rates to rise in 2015 and UK Gilts to move towards fair value at 3.25 per cent, this would lead to a negative price return and an overall capital loss for investors from here on in. We continue to prefer high yield credit which, while not cheap relative to historical valuations, is supported by low default rates and an attractive source of income as part of the total return
