Multi-assetJun 15 2015

Multi-asset predictions

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UK equities

We believe that UK equities will continue to be underpinned by an attractive dividend yield of 3.4 per cent on the FTSE 100. Valuations look reasonable, especially in the small-cap sector, and the ongoing economic recovery with real wages picking up. The election result was a positive for the market in that it removed an uncertainty, but this has now been replaced by the unknown timing of a European Union referendum, as well as the prospect of the first interest rate rise. But with headline inflation now negative this has been pushed well into next year.

European equities

The outlook for eurozone equities remains positive due to the European Central Bank’s aggressive quantitative easing (QE) programme, the fall in the value of the euro and the gradual pick-up in economic activity. Valuations remain reasonable but are no longer compelling. The market may have got a bit ahead of itself earlier in the year but has now had a healthy setback, which could prove to be an opportunity to add exposure. Recent volatility in the eurozone sovereign bond markets was unsettling, while the saga in Greece is an unwelcome problem.

Emerging markets

We have recently adopted a more positive view on emerging markets (EMs), where valuations remain reasonable, in contrast to equities in most developed markets. With attention this year having focused on markets such as the eurozone, EMs have lagged and have become somewhat ‘under-owned’. But on a very long-term view they may be attractive with global economic growth recovering. The stabilisation of the oil price is a positive factor, though the outlook for commodities is uncertain, while looming US Federal Reserve rate rises are a potential headwind.

US equities

We continue to have a negative view on US equities due to valuations such as the price-to-earnings ratios, which are starting to look more stretched. The US first-quarter earnings season has almost concluded and has on average positively surprised. But we remain concerned that the quality of earnings growth is not that high, being driven more by lower costs than revenue growth. Furthermore, the rise in the dollar from last year will be a headwind for the market, while there also remains uncertainty on the timing of the first US interest rate hike.

Property

We maintain a positive view on UK commercial property in spite of the attractive gains seen in 2014. The sector is supported by attractive yields versus government bonds, healthy inflows, capital values on average still below 2007 peak levels, and we are now seeing good rental growth. There is also low supply, with the level of available office space in the City at its lowest for more than a decade, which will support rents, although property development is picking up. We don’t expect the same returns as in 2014 and favour the secondary market away from the south east.

Bonds

The recent volatility and weakness in government markets originated in the eurozone as investors rejected the ultra-low yields on offer. Although the markets appear to have stabilised, the rise in volatility was an unwelcome feature of supposedly ‘safe’ assets. We remain underweight in bonds as an asset class and we still see no value in gilts. But we do see value in some selective areas and we favour high yield as valuations are more attractive following the weakness in the second half of last year, with some high-yield funds offering yields of 5-6 per cent.

PETER FITZGERALD

Head of multi-asset, Aviva Investors

UK equities

The UK’s economic cycle is closer to that of the US than Europe, and we think the Bank of England is likely to follow the Federal Reserve in raising interest rates in early 2016. The UK economy is in reasonable shape and we expect to see growth of 2.5-3 per cent this year.

European equities

The eurozone is set to remain in policy stimulus mode for some time, and it has now seen seven consecutive quarters of growth. Last year the continent grew by around 1 per cent and we expect growth closer to 1.5 per cent in 2015. However, unless better sentiment leads to markedly higher spending, the worry is that things could slow or stall later this year or early 2016.

Emerging markets

Asia continues to be the fastest-growing EM region, although progress has slowed significantly. Greater reforms are required if the region is to boost productivity and bring growth back towards potential. Meanwhile, eastern European economies are enjoying a modest upswing in activity and Latin American economies continue to suffer from the slowdown in China and the falling commodity prices that have ensued.

US equities

In spite of an effective interest rate of zero, US GDP growth has averaged just 2.3 per cent in the past six years. The Federal Reserve is now preparing its first rate increase since 2006, which we expect to see in September or later. For now, markets continue to doubt the Fed’s ability to deliver the tightening it has so far forecast, but if GDP growth revives as we expect and inflation drifts higher, there is clearly scope for some surprises.

Property

Global real estate returns remain robust. Total returns in 2014 reached 9.9 per cent and we expect something similar in this year. Property continues to offer good value relative to other asset classes, with spreads over government bond yields unusually high.

Bonds

With monetary policy diverging between Europe and the US, a potential Greek exit from the eurozone, a slowing Chinese economy and a collapse in commodity prices, it remains difficult to judge where ‘fair value’ lies for government bond markets. Meanwhile, the economic outlook continues to favour global credit as, in spite of the prospect of a US interest rate rise, we expect global monetary policy to remain highly accommodative.

DAVID COOMBS

Head of multi-asset investments, Rathbones

UK equities

UK equities were relatively benign in the run-up to the general election and the Conservative win helped boost utilities and property firms. But there is more potential for volatility from the European Union in-out referendum, which is likely to be held sooner rather than later. We are underweight the UK because of this uncertainty and see more attractive opportunities elsewhere. There are also better growth opportunities for healthcare and technology firms in other markets, while growth companies will outperform when US and UK rates start to rise.

European equities

The launch of QE sent eurozone equities soaring, with the Euro Stoxx up almost 20 per cent so far this year in local currency terms. This short-term run could have further to go, though we believe QE is much too late to make any lasting difference. There are also fundamental structural problems in Europe that are yet to be addressed, particularly in the labour market. Besides a tactical passive position in Spain and targeted exposure to German exporters – which should benefit from a weaker euro – we are steering clear of the continent.

Emerging markets

EM equities have been growing well this year, helped by huge reratings in China. Opening up investor access between mainland and Hong Kong markets has sparked huge growth that is likely to continue for at least the short term. Another boost could come from a greater inclusion of A-shares in the MSCI Emerging Markets Index, which would force many foreign investors to enter the market. Many EMs are too vulnerable to a rise in the US interest rate for our liking so we avoid generalist funds in favour of country-specific strategies.

US equities

In spite of a run of poor economic news this year, the US is still a powerhouse, and the amount of jobs it is creating each month is staggering. The difficulty that some energy companies are experiencing due to the low oil price is small compared with the benefits to the economy overall. The US has many dynamic growth firms, a sector we prefer in a tightening monetary environment. While negative sentiment could affect equities in the short term, on a five-year view US consumers are the best placed to benefit, which will drive markets higher.

Property

Property fund premiums are around 5-13 per cent, which is a lot to pay up front for an investment, especially as the likelihood of further capital gains is diminished by the large gains that have already been seen. In addition, property prices historically tend to fall as interest rates increase.

Bonds

UK gilts have offered small nominal yields for some time and many investors say they are overvalued. But with inflation at historic lows, the real yield is still close to the long-term average of 2 per cent, although small nominal yields are dangerous. If inflation ticks up, that quickly eats into real returns, as will the rise in interest rates that everyone awaits. There is no buffer when yields are very small and minor changes have huge consequences. Meanwhile, the risks for corporate bonds are the highest they have been in 30 years.