Markets across the globe have been struggling to reach the heights seen before the 2008 crash. Emerging markets and the eurozone in particular have been hit hard during 2014, but some markets – the US in particular – have been going from strength to strength and consumer confidence is slowly improving.
David Coombs, head of multi-asset at Rathbone Unit Trust Management, thinks the best asset class for next year will be US large-cap equities. “I think the US has got the fastest growing economy and has all the benefits of oil and cheap petrol prices, and the consumer is getting a big tax cut,” he says. This in turn aids the US consumer and supports and underpins US growth. “From a UK investor’s perspective, the dollar will be strong against sterling next year, so you will get a double pickup. I think equities will see modest returns but the currency gain will be really important.”
Mr Coombs adds, “I think US equities and the dollar together are quite a good place to be. Having said that, the equity market is not cheap but we don’t think it is quite as expensive as others believe on a forward-looking basis.” Chart 1 shows the US dollar versus pound sterling over three years to 1 December.
Within the US, he likes the technology and healthcare sectors – the biggest areas of the US. “We also think US interest rates are more likely to rise faster than the UK.”
One area he will be avoiding in 2015 will be emerging market equities and bonds. “We are worried about emerging market currencies and in particular companies that borrow in dollars. Emerging market corporate debt looks vulnerable where the companies borrow in dollars but earn in their local currency, which is always something to be concerned about.”
“We are worried about what the contagion might mean for emerging market assets. And particularly worried about the Latin American part of emerging markets. We are also very bearish on commodities like energy and industrial metals,” he adds.
Elsewhere, Gonzalo Pángaro, lead portfolio manager for emerging markets equity at T.Rowe Price, believes emerging market valuations are attractive, but investors will have to be more selective. “With the end of the global commodities boom and the double-digit annual growth in China, careful stock selection will be important for long-term outperformance,” he says.
Near-term risks may include a worse than expected slowdown in China or a breakdown in its financial system, Mr Pángaro adds, as well as a sharp rise in US interest rates, and an unexpected bout of risk aversion due to geopolitical events.
Despite valuations being “as compelling” as they were a year ago, he thinks emerging markets overall are still trading at a significant discount relative to their history and will continue to look attractive against their developed market peers.
“Investors will have to be much more granular in their approach. We are likely to see a much more uneven world going forward, with less correlation and more dispersion of returns,” he adds.
The current environment is more complex and Mr Pángaro thinks it should provide a good opportunity for active investors to take advantage of any valuation anomalies. He cites Chinese internet stocks and Indian financials as interesting opportunities. “Current conditions may offer investors who are able to view the market with a long-term horizon an opportunity to add to the region at what may prove to be attractive levels.”
David Vickers, senior portfolio manager for the Russell Investments Multi-Asset Growth Strategy, says the best way to choose the right asset mix in a portfolio is to make sure the investor is in a multi-asset fund that has flexibility to move between assets. But his preference on a country level is towards Europe and Japan over emerging markets and the US.
“The US market is expensive,” he says. “European margins are much lower. And while the market isn’t cheap, there is potential the markets can expand and prices can go up.”
He says Japan may be an unlikely first thought for investors as it has been in deflation for 20 years, but it has a favourable currency and the exports are helping drive the economy. “Some Japanese companies have been dealing with the deflation very well.”
Although managers are torn over which market may be the best for 2015, it is clear that a wide spread over different continents as well as assets could be key. Across many countries, the end consumer is an important driver of the economy. Fundamentals across the globe are vast, with the US looking to expand further to help overall global growth, and European uncertainty dragging slightly.
There are also additional geopolitical risk issues that could arise in some emerging markets, but there are still many pockets of potential to be found.
