Rob Burdett is co-head of multi-manager at F&C Investments. The F&C multi-manager team collectively manages more than £21 billion in assets.
Chris Wyllie is chief investment officer at Connor Broadley, a financial planning and investment management firm with £350 million under management.
Richard Dunbar is deputy head of global strategy at Aberdeen Asset Management. The company has £330 billion under management.
Keith Wade is chief economist and strategist at Schroders. The asset management company has £416 billion under management.
Alan Higgins is chief investment officer at Coutts, the private banking arm of RBS, which has £14 billion of assets under management.
Eurostar on track to upstage US
Even though evidence abounds that the global economy is now in a rare synchronised uptrend, there is plenty of anxious handwringing going on among the investment pundits. Moreover, the surprise announcement on 18 April that a general election will take place on 8 June is bound to add to uncertainty – something financial markets detest.
Two of our panel members are worried about an impending wobble on Wall Street. Rob Burdett at F&C Investments thinks a correction of 10 per cent is likely before the summer is over. He says: ‘I may be a little early in my prediction, but we have had a 10 per cent correction in US equities every year for the past seven years. But the last time we had one was in January 2016, so we think another is overdue.’
Burdett has not identified a specific factor that might trigger a significant setback. But investors can now get a yield on index-linked US government bonds that is higher than the average yield on US equities. ‘That has not happened for many years. With interest rates rising in the US this year, higher returns on risk-free government bonds might prompt a change of mood,’ he says.
Chris Wyllie at Connor Broadley agrees on the likelihood of a significant dip later this year. ‘But the fundamentals of the US economy are looking good, and I don’t want to be caught out in too bearish a position,’ he adds.
Burdett has taken the apparently extreme position of taking his score for cash from 5 to 8 – a level not seen since this survey began seven years ago. His plan is to buy back into Wall Street on any significant setback. ‘It is an expensive market at present, and it has become more expensive in the past three months,’ he says. Having raised his score for US equities last time from 4 to 6, he is now reverting back to a 4 again.
There is plenty of caution about the US among other panel members too. Both Alan Higgins at Coutts and Keith Wade at Schroders have lowered their scores a notch to 4, while Chris Wyllie has gone from 6 to 5. No one is overweight in the US, and the average US equities score is down from 5.4 to 4.4.
This nervousness about the US should not be exaggerated, however. Even Burdett admits any significant setback would prompt him to quickly don his Wall Street buying boots again. The S&P 500 has risen from 735.09 in February 2009 to a peak of 2363.64 exactly eight years later, albeit with some dips along the way. It has had an impressive run, and against an apparently healthy economic background the long-term upward trend may well continue after Burdett’s forecast pause for breath. ‘It has always paid to buy Wall Street on these dips, and I think it will be right to do so next time,’ he insists.
Wyllie says we have to face the fact that we are in the late stages of a long bull market in US equities. ‘From now on, US equities will be seen more as a defensive investment than they were.’
Indeed, there is a general consensus that equity markets outside the US – particularly emerging markets (see box, page 23) but also Europe and Japan – are likely to outperform their currently dominant US equivalents in the near term. The average score for emerging markets is now 7, while for Europe and Japan it is 6.6.
Discord on UK prospects
Mixed signals are emerging in UK equities, and likely to become more pronounced in the run-up to the snap election. Even before the announcement, only Higgins was steadfastly bullish about UK equities, sticking with his score of 7. He remains convinced that the pound is oversold and that London, with its wide spread of major overseas earners dominating the equity market, will continue to be the beneficiary of the strengthening world economy, despite the fact that Brexit looms large on the UK equities scene.
‘The UK has been growing faster than any other developed country,’ he says. ‘We don’t pretend Brexit is going to be good for the UK, but we would not be buyers of sterling if we were really pessimistic about the final Brexit outcome.’ He points to recent big gains investors have made in overseas equity and bond markets. ‘We want to protect those gains by bringing money back into sterling and investing in the UK,’ he stresses. ‘So our advice to clients is to have less exposure to overseas equities than you normally would.’
Wade is the other panel member not to go underweight in UK equities. ‘A lot depends on how sterling reacts to developments in the Brexit negotiations,’ he says. ‘If those negotiations don’t go well, sterling will tend to weaken.’ That, he argues, would be neatly offset by the profit-boosting benefits to FTSE 100 companies, because they derive upwards of 70 per cent of their earnings from overseas.
Wyllie, however, is much less sure of the UK’s outlook. ‘I am not making any bold assumptions about what the UK economy is going to do,’ he says. ‘But current tailwinds producing growth might turn into headwinds, and the economy could easily go through a big air pocket in the next two years.’
Wade is concerned about the failure of UK businesses to translate recent good growth into any real quickening in the pace of capital spending. ‘That is in marked contrast to the US where the so-called “animal spirits” are now rising, leading to higher capital spending,’ he says.
Dunbar looks back on the performance of financial markets in the opening months of this year with quiet satisfaction. Equity markets have performed well across the board, and even the performance of government bonds has been quite upbeat. He says: ‘Most people were too bearish about government bonds at the start of this year, and the outcome so far is not what many would have expected.’
The markets seem to vindicate his approach of not straying too far from a neutral score in either direction in virtually every sector of the market. Unsurprisingly, the success of this approach has prompted him not to change any of his scores at this point. His only really negative score is a 3 for corporate bonds, which he feels do not now offer sufficient yield attractions at the investment-grade level to justify the extra risk they entail.
A feature of the latest survey is undoubtedly the swing in sentiment in favour of European equities. Economic growth in Europe has picked up unexpectedly to the point where the European Central Bank is wondering whether to taper the level of its monetary stimulus. Rob Burdett has gone from underweight to neutral by lifting his score from 3 to 5. Higgins has also gone a notch higher to 7. The odd man out is Wyllie who remains underweight, preferring Japanese to European shares.
The performance of Japanese shares has disappointed so far this year, and that is reflected in a slight lowering of the average score from 7.2 to 6.6. This follows the decisions by Wade to cut his score here from 7 to 5 and Higgins to shade his score from 8 to 7. Wade’s concern is that a stronger yen might upset efforts by the Japanese government to stimulate growth. He says: ‘We think it will be difficult for the Bank of Japan to remain out of step with everyone else. Others are tightening monetary controls, while Japan still has the monetary taps fully open.’
However, Burdett, a long-time Japan bull, remains loyal. ‘It is still the market with the best fundamentals, and the specialist fund managers we talk to there are pleased with the way the economy is performing,’ he says.
Elsewhere, despite better-than-expected performance by government bonds in the first months of 2017, there is no sign of increased enthusiasm for this sector. Weightings remain cautious. To a man, the panel is underweight in government debt and overweight in equities.
The froth of enthusiasm has largely blown off the property market, although Higgins remains overweight and notes the keenness with which Chinese buyers are still chasing prime central London developments.
In contrast, enthusiasm for gold in the remains high. Wyllie, Higgins and Wade are all fans of the metal. ‘Real interest rates are hard to find, and that is when gold comes into its own,’ says Wade. But the consensus is that oil – the key commodity – has ended a year-long recovery that saw its price nearly double from its low point early last year.
A general upward trend in base metal prices, has persuaded three panellists to keep their commodities scores above neutral. At present the global economic outlook appears sunnier than it has for some years, the US is growing healthily and consumer confidence there is at a 16-year high. Meanwhile, growth has at last resumed in Europe and Japan, while the UK economy seems at the moment to be sailing blissfully through the trials and tribulations of the lead-up to Brexit.
Quantitative easing question
The explanation for all this investor exuberance is not difficult to determine. So much monetary stimulus has been pumped into the global economic system that the world economy was always going to get the coordinated lift-off central banks intended. Now, however, the monetary screws are being tightened in the US, where interest rates are rising. All the signs are that the UK and Europe will eventually follow the US lead, as may Japan.
Financial markets always look ahead, and early next year they may well be starting to anticipate the bearish effects of a significant change of tack on quantitative easing. Dunbar warns: ‘The central bankers have been undertaking a massive monetary experiment called quantitative easing, with no instruction manual to rely on. Equally, the withdrawal of quantitative easing is a massive monetary experiment – again with no instruction manual.’
It’s fair to say we can anticipate the usual unexpected swings in sentiment and market bumps along the road in the months ahead.
Hopes fulfilled in emerging markets
Emerging market equities had their best quarterly performance for ve years in the rst three months of 2017. The MSCI Emerging Markets index rose by 11.4 per cent in the period as worries over president Donald Trump’s threatened protectionist policies lessened, along with fears over rising US interest rates.
Recovering commodity prices helped Latin American stock markets, while Eastern European markets also grew.
The encouraging trend was a long time coming, but fairly well anticipated by members of our panel.
They obviously think the strong performance will continue. Alan Higgins has pushed up his score from 7 to 8. Keith Wade, who is switching some funds out of the US and into emerging markets, has raised his score from 5 to 7.
Overall, the emerging market equities sector is now the most highly rated, with an average score of 7.
The strength of the US dollar recently has held back the recovery in emerging markets. The strong US currency has tended to draw funds back to US financial markets, while the higher dollar increases the dollar-denominated debts of emerging countries. Now there are signs that the power of the mighty dollar is waning a little.
As the global recovery spreads, the price of commodities edges higher to the bene¬ t of regions such as Latin America and countries such as Indonesia and Russia. Eastern Europe has gained from the recovery in core eurozone countries.
Emerging economies have more scope for lowering interest rates, an option now virtually unavailable in the developed world because rates are at rock bottom. ‘[Also] the governments of emerging markets tend to have better balance sheets, giving them more scope to cut taxes if need be,’ Chris Wyllie points out.
Worries about what may happen in China have in the past acted as a wet blanket on the sector. But Alan Higgins says: ‘We are humble on China. We are never quite sure what is going on there. But the further away from China you are, the more bearish pundits tend to be. Those on the ground in the Far East tend to be more positive.’
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