Head of multi-asset investments, Rathbones
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.
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.
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.
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 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.