As we come to the end of the first half of 2016, what does the next quarter hold for investors? Investment Adviser asks some multi-asset managers for their views on the main asset classes
John Stopford, co-head multi-asset, Investec Asset Management
The current economic expansion is likely to continue making us constructive towards cyclical assets, such as equities. That said, we expect growth to remain lacklustre. This will support higher yielding stocks and higher quality companies. Equity valuations are fair rather than cheap, but valuation is only really important at extremes. Although the UK is currently subject to ‘Brexit’ risk, assuming that the electorate votes to remain in the EU, we see opportunities in domestically orientated equities, where valuations are reasonable.
We are less constructive on stocks in Europe outside the UK. Valuations are positive, and the economic backdrop has been on an improving trend, which should help earnings, but momentum signals have deteriorated and quality measures are neutral, at best. Within Europe, there is a disproportionate number of opportunities within Scandinavia, including quality franchise businesses and Nordic banks, which we view as the most attractive area within the global banking sector.
We see potential for selective emerging market equities to deliver decent returns, albeit with high levels of volatility. Valuations are attractive and quality metrics are now on an improving trend. Cyclical drags from weaker commodity prices have faded – especially from oil, where supply adjustments should underpin higher prices in the medium term. China remains a concern, given an unbalanced economy, but the authorities will be able to avoid a hard landing. In emerging markets, we prefer defensive sectors, but this is slowly changing.
The US equity market scores poorly on the measures we focus on. In particular, the stockmarket is relatively expensive. That said, the US remains the most dynamic and innovative of the major economies and, at an individual stock level, we can find plenty of attractive names. The aggregate scores are dragged down by energy and healthcare, with other sectors offering better potential. A re-rating of the energy sector is largely dependent on the extent to which prior weakness in the price of oil, and strength in the dollar, reverse.
We expect property to continue to benefit from rental growth in the Anglo Saxon and European economies, but are cautious towards Asian real estate. Leverage is low, balance sheets are in good shape and borrowing costs are attractive. Yields, however, are fair with limited scope for further re-rating. Limited supply and ongoing demand should underpin current pricing. Although UK property should rebound if the UK votes to remain in the EU, concerns over Brexit mask deeper issues regarding London property.
Government bond yields will be held down by weak trend growth, low inflation and central bank support. Valuations are moderately expensive, especially in the US and UK, and the US Federal Open Market Committee may raise rates faster than market pricing. Corporate bonds appear fairly valued, and leverage ratios suggest pressure on credit quality, but ECB buying and low interest rates are helping to maintain demand for new issuance. Emerging market debt looks fairly cheap, but this is largely deserved and exposure should be selective.