Markets: where are we now?
Fund managers from around Schroders exchanged views on the current state of various markets around the world at a recent panel discussion. Here, we round up their insights.
2 February 2015
Marcus Brookes, Head of Multi-manager
Marcus Brookes holds a strongly positive view on the US economy thanks to the Federal Reserve’s willingness to remove its quantitative easing measures, a falling unemployment rate and, most recently, signs of real wage growth.
He thinks the large recent falls in the oil price are a “fantastic tax break” for consumers in the US and Europe. Indeed, in Europe, the prospect of less austerity, a weaker euro and lower oil prices also make for a promising economic outlook.
On stockmarkets though, Brookes favours Europe and Japan over the US:
“As bullish as we are on the US economy, we think it is already in the price. It’s not new news that the US has had a fantastic recovery and we think returns from the US market will be slightly stodgy from here.
People are still pretty bearish in their view on the European and Japanese markets and I think they need to upgrade them. You find relatively cheap valuations there, and this is where our multi-manager portfolios are overweight”.
Meanwhile, he thinks the bond market is heading for a shakeup:
“Considering our bullishness on the economy, it means we are probably going into a different environment where interest rates of zero look less appropriate. For the US, if our bullishness is correct and the last piece of the recovery jigsaw was wages picking up, then our view is that rates will go up this year.
The bond market needs to be pricing a different environment, which it really isn’t at the moment. It’s still fretting about deflation rather than focusing on the economic resurgence.”
Gareth Isaac, Fund manager, Fixed Income
Gareth Isaac broadly agrees with Marcus Brookes’ view of the world economy, but – focusing on his own asset class - admitted “something strange is going on in bonds”.
"Against a backdrop of an improving economic outlook driven by falling unemployment and rising wages, the recent bond market rally does not seem justified. Due to the oil price fall we’re still going to have deflationary pressures in the short-term, but as a strategic investor focused on the medium-term I think that the lower energy prices will help drive consumption and economic growth higher. Our analysis indicates that yield curves have flattened too much and the markets are concentrating too much on where headline inflation is today rather than where it will be over the medium term.”
Something strange is going on in bonds.
I think we are nearing the end of the current falling yield cycle. Bond yields are clearly mispriced if you think, like me, that the outlook for the economy is quite promising. Despite my immediate concerns over the level of bond yields, I don’t foresee a structural bond bear market due to demand from pension funds, but I do think we will get a re-normalisation of bond yields as interest rates start to rise in 2015.”
Andrew Rose, Fund manager, Japanese Equities
Looking at Japan, Andrew Rose thinks “Abenomics”, the economic programme implemented by Prime Minister Shinzo Abe, has not yet achieved its goals.
“Abenomics hasn’t delivered growth and has not really been of broad benefit to Japan yet. Under Abe’s watch both real GDP and real incomes have been flat lines. The re-firing of the first two arrows of the programme (aggressive monetary policy and more flexible fiscal policy) is an implicit recognition that more needs to be done. This begs the question: will it be more successful this time around? This remains to be seen, but lower oil prices and a tight labour market increase the chances of success.”
On the equities front, Rose is positive.
“The macro backdrop is supportive, but there is a positive bottom-up story too when you consider valuations, profits and incentives to improve corporate governance.”
Many observers remain focused on the yen’s trajectory, as it depreciated sharply in 2014. Rose thinks its outlook is hard to predict, but is cautiously positive that the bulk of its depreciation is over.
“The key driver for the yen will be how the Bank of Japan responds to the impact of lower oil prices on core inflation. Ultimately a lower oil price has a stimulatory economic impact, but it also makes meeting short-term inflation targets impossible.”
James Sym, Fund manager, Business Cycle - UK & European Equities.
James Sym thinks there is a considerable opportunity in European equities.
“Europe is very cheap compared to other asset classes, especially considering the recovery that could occur in companies’ profits. I think 2015 will be the first year in five that profits in Europe will grow faster than in the US. This is not only because the euro has weakened by about 15%, but also because of the fall in the oil price which, broadly speaking, I think will boost consumption by around €750-€1000 per household. Both of these factors should provide a big boost to the economy and to corporate profits.
Combine them with depressed earnings and reasonable valuation levels, and I think there could be some attractive returns from the region.
Of course, I have to be very selective as some companies look very expensive, but there is a very deep opportunity set available.”
He also points out there could be a significant asset allocation shift to provide further support.
“Most global investors are underweight Europe and overweight the US. If 2015 is the first time in five years that European profit growth outstrips the US, then there is a huge amount of money that is going to need to move from one asset class to another.”
Matt Hudson, Head of Business Cycle
Looking at the UK equity market, Matt Hudson explained where he is seeing the best prospects at this point in the cycle.
"This business cycle was always likely to be extended, particularly given the unconventional stance of monetary policy, and the recent falls in the oil price will help to extend it further. We are in the later expansionary stage of the cycle and I am positioning portfolios more defensively.
However, there is an opportunity to make decent potential returns in UK assets that have either been deemed not high enough quality or too cyclical. The market seems to have given up on anything that isn’t a bond proxy or long duration and that is where the opportunities lie. We are favouring consumer and services companies over manufacturers and industrials.”
Nick Kirrage, Fund Manager, Co-head Schroder Global Value Team
Nick Kirrage also focused on the UK market, and prefers to concentrate on the long-term prospects of individual companies, rather than the effect of shorter-term macroeconomic events.
“2009 presented a generationally attractive opportunity to buy shares on low valuations. Six years later and with the UK market up nearly 100%, investors face a very different set of investment choices.
Despite the market’s rise, pockets of value remain and today’s opportunities need to be seen in the context of long-term valuations, not near-term price moves. Areas like banks and supermarkets present compelling value for long-term investors and we are in a small minority buying in these areas.”
Ultimately, value investing is about exploiting human nature; identifying companies where emotions have divorced share prices from long-term reality. This is not the preserve of either bull or bear markets but a constant feature of the stockmarket over many decades. In the near-term, we remain cautious, as ever, given the significant run-up in equity markets over recent years. However, over the long-term, we remain convinced that humans won’t change; they will continue to be the constant factor in markets, providing the emotional aspects of fear and greed that gets into stock prices and allows a value investment strategy to outperform, as it has over the past 100 years.”
Peter Harrison, Head of Investment
Summing up, Peter Harrison discussed the increased level of volatility he expects to see throughout 2015.
“There has been a bull market in complacency, and volatility has been very low as the world became very comfortable. Yet, in the past few weeks, we’ve seen the third largest move in the oil price since 1900 and with the Swiss franc we saw the largest one-day move in a major currency pair ever.”
Tensions in the world are very real and it seems inevitable that this year volatility will be higher than it has been in the recent past. I think that’s a good thing – we need to get risk back into markets.”
We are seeing more growth everywhere; the oil price fall is a huge stimulus that has changed a lot of things and made Europe considerably more attractive relative to other asset classes. There are still signs of value in equity markets.”
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