Vincent McEntegart, manager, Kames Diversified Monthly Income fund
UK equities
With the Brexit vote out of the way, the source of UK-listed company earnings is driving share prices. Sterling weakness has been supportive for 2017 earnings-per-share estimates and is acting as a strong tailwind for firms sourcing the majority of their earnings abroad. However, domestically focused stocks have suffered in response to lower economic growth forecasts following the vote. With yields falling, we remain cautious on the outlook for financials and favour stocks with strong cash-generating abilities that can grow earnings.
European equities
European equities have recovered somewhat following the referendum, primarily on the back of a reasonable earnings season. But economic growth and inflationary pressures remain subdued, and the problems facing the eurozone’s periphery banks are unlikely to be resolved any time soon as more falls in bond yields increase pressure on financials. Hence we see the fundamentals of earnings backed by cash generation to be the key drivers of performance going forward, and we are focusing on stocks with positive earnings momentum.
US equities
We feel volatility in US markets implies too benign an outlook given the extent of political and economic risks on the horizon. This is against a backdrop of weak corporate confidence and capital expenditure, and we feel valuations are based on high expectations of earnings growth or intervention. We do not believe the required level of growth will materialise, with management guidance regarding third-quarter earnings looking negative and the impact of lower interest rates on corporate pension plans being a further drag on firms’ ability to invest.
Emerging market equities
Economic growth in emerging markets has stabilised and valuations trade at a favourable discount to developed market counterparts. Momentum has been with emerging markets recently, with earnings beating expectations on the back of rising margins and signs of top-line improvement. For this to continue asset prices and global growth need to keep ticking upwards. Herein lies the risk – too much growth is likely to choke momentum as an improving macroeconomic environment fosters the conditions for US rates to begin rising.
Property
UK property prices have fallen in the wake of the Brexit vote, driven in part by forced selling due to retail redemptions. There is currently a short-term opportunity for investors to acquire higher-yielding, quality assets at attractive prices. The listed property sector offers a number of opportunities outside of the UK, in developed and emerging markets. Recent returns have been strong, and in a lower-for-even-longer interest rate environment this is likely to continue.
Fixed income
Government bond valuations continue to look stretched, with yields globally sitting at or around historic lows. Yields have been driven by technicals, with the Bank of England announcing a new monetary stimulus package in the wake of the EU referendum and monetary policy in the eurozone and Japan remaining accommodative. Credit valuations also look stretched, particularly when you take note of the potential to the downside for fundamentals.
Philip Saunders, co-manager, Investec Diversified Growth fund
UK equities
Our neutral stance on UK equities reflects a balance between positives and negatives for the asset class. The UK’s vote to leave the EU has led to uncertainty going forward. In local currency terms, large-cap UK equities have rallied significantly, which is a headwind from a valuation perspective. But one of the catalysts behind this rally has been sterling weakness. Market positioning is short and recent data releases suggest the immediate impact of Brexit could prove to be more muted than has been feared.
European equities
After the Brexit result concerns markets would suffer proved to be overdone. Material differences exist across Europe on both a regional and sector basis. We have a neutral view with valuations appearing somewhat more attractive, while regional equity markets continue to see outflows. We remain bullish on pharma firms, which we believe represent cheap defensive stocks with scope for growth. German real estate and Nordic banks are other attractive areas, particularly the latter given the healthy yields and returns on equity.
US equities
Despite their high absolute and relative valuations, many US equities continue to score well in our bottom-up process and still warrant a full allocation in our view. The consumer sector in the US economy has proved to be resilient, offsetting weaker energy and manufacturing. Corporate margins have remained high, despite softer growth in aggregate and earnings dynamics now showing signs of bottoming out. This is reflected in the recent better performance of more cyclical sectors, such as technology, financials and industrials.
Emerging market equities
Emerging market economies are still adjusting to a structurally slower growth path, but cyclical dynamics are now showing signs of improving. Inflation, having never got to the crisis levels of the past, is also moderating, particularly in higher-yielding emerging debt markets, where currencies are supported by central banks that have pursued more restrictive monetary policies. In an emerging market context, we prefer Europe, the Middle East, Africa and Latin America to Asia, which is a narrower play on value.
Property
Property stocks have had a good run, given their attractive combination of income and growth in a period of subdued interest rates. This has been particularly so in the US, the eurozone and Japan. While we still remain constructive over the medium term, a period of consolidation is our current base case. We retain a preference for growth assets but are mindful that exposures that have benefited from the downward adjustment in interest rate expectations may be vulnerable. Consequently we favour higher allocations to more cyclical areas of markets.
Fixed income
We continue to see value in smaller developed bond markets where interest rates may be cut, such as in Canada and South Korea. However, overall we see some risk of a sell-off in major bond markets as investors reassess the efficacy of negative rates and evidence of a moderate improvement as the cyclical environment unfolds.
Gary Potter, co-head, F&C multi-manager solutions
UK equities
We are all waiting to see what happens with regards to Brexit, but what investors need to remember is that the UK equity market is not the UK economy. It’s one of the most diversified equity indices in the world and it might surprise on the upside once the dust settles. There are challenges ahead, but investors should be ready to embrace some of the opportunities that may arise.
European equities
Europe is home to myriad companies and countries. There are some firms that are fabulous, even when put on a global stage, but the challenge is that Europe is a highly politicised landscape. Brexit is going to be critical in shaping Europe, and we also have the upcoming Italian referendum and elections in Germany and France next year. Following the UK vote we have shifted our weighting from overweight to underweight in our portfolios.
US equities
As a starting point we need to acknowledge that the US economy came out of the financial crisis quicker than everyone else. The US equity market appears expensive relative to global equities. But investors need to be careful as US equities are not that overextended when compared with bonds. Also, investors need to bear in mind that the US stockmarket offers access to world-beating firms that cannot be found elsewhere. Greater stability in the dollar should be supportive of the market, but the looming election will bring greater volatility.
Emerging market equities
Even when you take into consideration currency, the total return of emerging markets since the start of the year has been impressive. This comes off the back of a troubled period since 2011, relative to developed equity markets. The stabilisation of the US currency has helped emerging markets intrinsically linked to the dollar. Stability in China and commodities have also been positive factors. The outperformance of emerging markets over developed markets is set to continue.
Property
How to access real estate and the investment parameters by which the fund manager operates in are more important questions than ever. We see positives as well as negatives when it comes to property. There are bumps in the road for UK real estate, with the outlook unclear in light of the Brexit vote. We are more comforted by global property but, like fixed income, it’s about finding a fund with the right structure, liquidity and with a broad investment remit.
Fixed income
It is fair to say that the current level of prevailing yield in the fixed income market is something most would have thought unachievable. Economic growth, interest rate expectations and the outlook for inflation have all been suppressed by a combination of factors, and investors are unsure about where to go next. We do not think the market dynamic will change significantly any time soon and we are in an elongated cycle. Investors need to be thinking about diversifying their fixed income assets, which inevitably will involve more risk being taken.
