Multi-assetNov 12 2014

Class can still generate a premium despite ‘setback’

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Multi-asset investors will be keeping a close eye on the outlook for the global equity market on the basis that the majority of multi-asset strategies have exposure to equities.

Keith Wade, chief economist and strategist at Schroders, observes that the equity markets have experienced a “setback” recently, although he insists the asset class can still generate an attractive premium for investors.

“There has been a change in the relationship between the global equity index and sovereign bond yields, from one where both moved in the same direction to one where the two have parted company,” he explains.

“Some see this as setting up a battle between bond and equity markets – falling bond yields are often associated with expectations of weaker growth, which is a bad outcome for corporate earnings and thus equity prices.

“Since global growth expectations have been falling this year, the argument goes that equities will soon start to track bond yields lower, and the correlation between the two will become positive again.”

But he points to Schroders’ seven-year return forecasts, which show equities making single-digit returns and outperforming bonds and cash. “On this basis, absolute returns may not be as high as in the past, but global equity markets still offer a risk premium over bonds on our projections,” he adds.

Scott Spencer, investment manager in F&C Investments’ multi-manager team, reiterates his preference for equities within a multi-asset class portfolio and ranks equities as a stronger asset class than fixed income and property in the long term.

So what is the outlook for equities across regions?

Turning to Europe, Mr Spencer says: “We do think valuations of European equities are attractive, especially against the US and the UK, so we buy into the valuation argument.

“We also think that, unlike the US which is coming to the end of its easing cycle, Europe hasn’t started that yet. We would expect more quantitative easing ahead. However, we’re very aware that it’s quite risky and we haven’t actually seen the European Central Bank do anything yet.”

Mr Spencer is also positive on Japan, where he sees prime minister Shinzo Abe’s reforms, called ‘Abenomics’, prompting investors to consider Japanese equities.

He notes: “We can see a positive catalyst in Abenomics. We see it as an area of great opportunity to deliver alpha if you pick the right manager.”

Closer to home and it looks like there are some jitters around the UK equity market, with the prospect of the general election next year and an interest rate rise looming.

Investment strategist at Russell Investments, Wouter Sturkenboom, elaborates: “Over the last two quarters, we have seen growing confirmation of a more sustainable economic recovery in the UK driven by business investment and employment growth.

“However, we believe that in this environment, Bank of England governor [Mark] Carney is under increasing pressure to launch the first rate hike.

“For this reason, he will begin to slowly but clearly set the scene for this occurrence, which may negatively impact UK market performance.”

But he suggests there will continue to be value in UK equities in the fourth quarter of this year.

Ellie Duncan is deputy features editor at Investment Adviser

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