Equities  

Iraq, Ukraine pose threat to profits

This article is part of
Mid-Year Review - July 2014

The first half of the year has seen certain rotations within the equity market, including a switch from macro views to more focus on fundamentals, and from mid and small caps towards their larger cap peers.

The first half of the year has seen certain rotations within the equity market, including a switch from macro views to more focus on fundamentals, and from mid and small caps towards their larger cap peers.

Meanwhile, on a regional basis, Europe continues to benefit from an upswing in investor confidence, no doubt helped by Mario Draghi and the prospect of further monetary policy measures from the European Central Bank, while emerging markets appear to have shaken off the negativity of last year’s sell-off and performance is starting to improve.

For the year to date to June 26, the best performing regional index has been the S&P 500 with a return of 3.86 per cent, according to FE Analytics, compared with 3.04 per cent from the MSCI World and 2.95 per cent from the MSCI Emerging Markets indices.

Europe, which has been garnering plenty of attention in recent months, is lagging behind, with the MSCI Europe index delivering a return of 1.96 per cent, while the FTSE All-Share index has returned 1.38 per cent.

Interestingly, the growing concerns over the success of ‘Abenomics’ and Japan’s economic resurgence has weighed on the Nikkei 225 index, resulting in a loss of 5.56 per cent for the year to date.

But with prime minister Shinzo Abe finally unveiling the long-awaited ‘third arrow’ of structural reform in June, including plans to reduce corporation tax and improve corporate governance, this could be the catalyst for a further boost for Japan’s equity market.

The importance of what you actually invest in, however, is clearly demonstrated by the fact that while the S&P 500 dominates the regional indices in terms of investing in mutual funds, the average return of the IMA North America sector was just 2.53 per cent for the year to date. It was beaten into second place by the performance of the IMA Asia Pacific ex Japan sector with an average return of 3.15 per cent.

However, consistency in the emerging markets is highlighted by the fact the IMA Global Emerging Markets sector average of 2.06 per cent puts it in third place above funds focusing specifically on European, UK, Japanese, Chinese and Global equities.

In terms of sectors and styles within the equity markets globally, there has been an increasing focus on the need for companies to start delivering earnings growth to match the recent re-ratings, particularly in Europe and Japan.

Asoka Wöhrmann, co-chief investment officer at Deutsche Asset and Wealth Management, notes: “Even after strong developed equity market gains in May and early June, we remain generally positive. Although valuations continue to look rather high, there is still a range of factors that could drive markets higher – most obviously, an improving economic environment, central bank policy and upward corporate earnings revisions.”