Having suffered a fair degree of disappointment through the year, investors are sitting once again at a cross-road; stock markets have undergone a correction of about 10% in most major indices and government bonds are once again looking rather expensive. So how should investors be positioned as we go through the final stretch of 2014? Let’s take each area at a time, as we at Rathbone Investment Management view the world:
Developed Market Equities
We still like the United States as an economy and continue to believe it has the best chance of achieving escape velocity as it was the first to rid its banks’ balance sheets from toxic assets and free them up to lend to corporations and individuals. Although we are not reading too much into the strong employment figures, we are encouraged by the trend and believe the Federal Reserve will not undo all its hard work by tightening before tangible signs of real wage growth are prevalent on a wide-spread basis – something that is not yet happening we should add.
The US consumer is however enjoying a rare set of tailwinds: lower energy costs (thank shale gas and tight oil as well as a generally slowing Chinese economy for that) and low costs of borrowing (thank central banks for that). The US dollar is starting to reflect this stronger economic backdrop and has been appreciating vs. most its peers. As long as USD rises gradually and does not choke off earnings from US exporters, we like the stock market, focussing mostly on the larger, high quality companies.
Within the UK, we see further weakness ahead for sterling; wage inflation remains elusive and house prices have cooled off somewhat on the back of more stringent mortgage lending standards. Furthermore, we expect already-scheduled post-election spending cuts and tax increases to keep a lid on economic growth and thus reduce the need for the Bank of England to raise rates by anything more than a token amount anytime soon. We favour companies with robust balance sheets, sterling costs and overseas (preferably USD) revenues in this environment.
Europe remains challenged for growth and an already weak positions has been further exacerbated by sanctions on Russia and a weaker (than of late) Chinese market. That’s not to say that there are no opportunities for investors in European stocks; merely that they will be facing more headwinds and earnings will be at risk. Within Europe, we would favour high quality companies that are exposed to the US market and have strong pricing power.
Japan has been a roller-coaster of a market, as investors want to believe that Abenomics will work but remain jittery with every negative comment in the media or weak economic print. The great hope is that the Government Pension Fund will allocate a greater amount to the domestic equity markets but an announcement remains elusive for the moment. We continue to maintain exposure to this area, as valuations remain compelling and the Bank of Japan remains determined to inflate asset prices further.
Emerging Market Equities
The greatest mistake an investor can make is to lump Emerging Markets as one asset class and not consider the nuances and underlying dynamics of each region and country. The days of EM equities all moving in unison are over in our view and investors would do well to favour economies that are on the right side of the Chinese slowdown trade; as commodity prices weaken and the US dollar strengthens economies which are commodity importers and have healthy current account positions. India is probably the best case in point in this category, with a new wind of reform blowing under the leadership of Prime Minister Modi.
The key message for investors here: be very selective and careful with your country and sector allocations to avoid disappointment.
We’ve been worried about the High Yield (junk bond) market for some time now, sounding the alarm bell on this party early on and cutting our exposures for portfolios as the upside was drastically diminished and risks were elevated. Instead of High Yield debt we would favour Investment Grade debt which is of higher quality and, although income yields are barely higher than government debt, default risk is negligible.
Government bond markets have been the market that many investors have loved to hate; they have been grossly manipulated by central banks’ quantitative easing policies over the last 5 years and valuations have been driven to stratospheric levels. Following signs of a normalisation in policy by central banks, valuations have become a bit more attractive but by no means cheap. Having said that, investors should not expect government bond yields to return to pre-crisis levels anytime soon and should come to terms with a bond market that is likely to trade within a range, while remaining at relatively elevated levels (i.e. yields will remain suppressed compared to historic norms).
Although my company doesn’t express a view on the Shipping industry in particular, my personal view is that Shipping will remain challenged as it continues to suffer from the supply glut of new ship deliveries at a time when China is slowing down and commodity prices (especially industrial commodities and iron ore) are struggling for support. Having said that, it is during times of market dislocations and crisis that great fortunes stand to be made. Backing the right operators with the right fleet mix in the right sectors can be a very savvy and profitable move for investors who have a strong stomach for market volatility.
If anybody wants to talk more about any of the above views, please get in touch with Evangelos Assimakos at: email@example.com
Evangelos Assimakos is responsible for managing a number of portfolios for private individuals, personal pensions, trusts and charities. He sits on the firm’s Strategic Asset Allocation Committee as well as the fund selection committees responsible for fixed income and commodities research. Prior to joining Rathbones in early 2012, Evangelos spent seven years at Turcan Connell Solicitors and Asset Managers, where he managed private client portfolios and was responsible for the firm’s fixed income and commodities research. Evangelos holds an honours degree in Actuarial Mathematics & Statistics from Heriot Watt University and is currently a CFA Level 3 candidate. He also holds the Investment Management Certificate (IMC) and is a member of the Chartered Institute for Securities and Investment (MCSI).