Summer Investment Monitor: Expert views

David Hambidge – director of multi-asset funds, Premier Asset Management

The FTSE

As is the case with many of the world’s stock markets, we believe UK equities are overdue a correction although it is difficult to see what might trigger this in the short term. To us, large caps now offer better value than mid and small caps and as a result we have a bias towards the FTSE 100 in our portfolios.

Europe

European equities have enjoyed a tremendous run since Mario Draghi’s ‘whatever it takes’ speech in the summer of 2012. However, corporate earnings in the region have continued to disappoint and therefore equities are no longer in cheap territory. For the market to kick on from here we need to see European companies start to deliver decent earnings growth but with economic growth continuing to disappoint, that looks unlikely in the short term.

Emerging markets

Valuations in emerging markets look attractive to us and we have been topping up our positions into weakness this year. However, the sector is notoriously difficult to call over the short term but with economic growth and corporate profits likely to be stronger than most parts of the developed world over the long term, we feel now is a good time for investors to gain exposure.

US

The US is our least favoured equity market as it is, in our opinion, overpriced and over owned. Share buybacks by American corporations (and therefore a shrinking equity market) have clearly supported prices but on a longer term cyclically adjusted basis the market looks very expensive while we believe that margins are also likely to come under pressure. Of course, we’re not sure of the exact timing but we will remain structurally underweight US equities for the foreseeable future.

Property

While assets such as equities have discounted better economic times (and they are therefore in the price), the UK commercial property market is now clearly responding to better economic growth. We believe that prices will continue to recover for the remainder of this year and beyond with the best returns likely to be seen outside London.

Bond yields

The strong performance of bonds has been the big surprise so far with the yields on longer dated paper having declined. However, our central case is that bond yields will drift gently higher over the remainder of the year and next year but do not expect any dramatic spike in yields over the short term. The high yield sector in our view is one of the more vulnerable areas of the bond market as it has now become more interest rate sensitive while still being at risk of rising defaults should the economy take a turn for the worse.

Justin Onuekwusi – multi-asset fund manager, Legal & General Investment Management

The FTSE

The UK economy is growing and we think inflation should remain low and growth strong relative to the rest of the developed world. We expect this will last at least for the next few years before inflation pressures start to build. The impact on the FTSE is less clear. The largest companies in the FTSE receive a significant amount of their earnings from overseas. In some sense, the global recovery could be more important to UK equities, given that more domestic-orientated small-cap stocks have performed well in recent years.

Europe

Europe is now one of the most favoured regional overweights, and these days there is little talk about the risk of contagion of a Greek default and barely a whisper is heard of the crippling unemployment in Spain. Europe has come a long way in confronting its problems, but full fiscal and banking union will take a long time and systemic risks still remain. Inflation remains at dangerously low levels. Risks could still resurface so investors need to carefully weigh these up and be flexible in their asset allocation.

Emerging markets

Taking a medium- to long-term time horizon, the case for emerging markets is compelling when compared with developed markets; increasing urbanisation, better growth dynamics, flexibility to reduce interest rates in a global economic slowdown and government balance sheets in better shape. If one takes a shorter-time horizon, until doubts around a Chinese hard landing and the Ukrainian situation have been resolved investors may want to proceed with caution.

US

The poor weather that plagued US economic data at the start of the year has now passed and we are seeing huge improvement, as expected. In this environment, US equities should do reasonably well as the labour market starts to recover and capital expenditure picks up again. Relative to other equity markets, however, US equities look reasonably expensive and investors may find better value opportunities elsewhere. We would expect US yields to rise as the US recovery picks up.

Property

The UK economic backdrop is improving, credit is more readily available for property investors and we are seeing a pick-up in capital values outside of London. These are all signs of green shoots in the property market. We prefer to invest in a direct property fund because in the short-term real estate investment trusts (Reits) behave a lot like equities and therefore carry equity-like levels of risk. Holding physical property assets gives investors the return of the underlying bricks and mortar without the noise that Reits bring.

Bond yields

Although gilt yields have increased they still remain very low by historical standards – it is entirely unrealistic to expect a similar period of falling yields. Investors need to seek greater diversification from their government bond holdings, taking on more international exposure. Since the financial crisis began, government debt of major western developed markets has been downgraded. It is therefore important to spread that risk across a wide range of countries.

Nick Samouilhan - multi-asset fund manager, Aviva Investors

The FTSE

We expect to see further gains from here, on the basis of an improving domestic economy.

Europe

Relative to other developed equity markets, we expect to see strong returns from European equities on the back of relatively cheap valuations. In addition, we expect further expansionary monetary policy from the ECB, with this feeding into European equities as well as the rate and credit markets.

Emerging markets

We expect to see further relative underperformance of emerging market equities versus developed market equities. This is due to continuing economic headwinds in these countries, and while they have become better valued versus developed equities than in the past, their valuations still do not fully compensate for their short-term risks.

US

The US market has in its favour an improving domestic economy, albeit with a poor first quarter. However, markets have priced in expectations of strong earnings for US equities this year, and firms would need to exceed those to deliver strong returns from here.

Property

The UK property market is currently generating strong yields, particularly relative to other asset classes, as well as undergoing one of its episodic periods of strong capital growth. We see both of these continuing in the near term.

Bond yields

Yields on bonds remain at historical low levels, and their further rally in the first quarter caught many active investors by surprise. While we don’t see a significant sell-off in the short term, we don’t see much return over the near future beyond that offered by the carry yield, which is barely above inflation.