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.”
Looking ahead for the rest of 2014, Mark Burgess, chief investment officer at Threadneedle Investments, suggests the outlook for equity markets is positive, helped by increased merger and acquisition activity.
He notes: “The style rotation over the past few months has been significant, but overall equity markets have been strong and current index levels suggest investors still have confidence in the outlook for profits.
“For that reason, we trimmed exposure not only to government debt but also to investment grade credit in late May, as the rally in core yields had left both asset classes looking expensive. We deployed the proceeds into Japanese equities, as the fundamentals here continue to improve while the market has lagged other developed regions over 2014.”
With geopolitical tensions rising around the globe, there is still plenty of opportunity for equity markets to be sent into a tailspin.
Oliver Wallin, investment director at Octopus Investments, says: “Like many others, we are looking for catalysts that could shake markets out of their apparent complacency. We are worried that investors are downplaying the potential impact of geopolitical events, such as the conflicts in Ukraine and Iraq.”
He adds: “While we still have a favourable long-term view on equities, we are wary about the short-term picture.
“When situations deteriorate it can happen surprisingly quickly, and we don’t want to be caught off guard if markets suddenly take a turn for the worse. For that reason, we feel more comfortable taking some profits and keeping them in cash for a while.”
Nyree Stewart is features editor at Investment Adviser
