From quantitative tightening to European inflation - how we are viewing the current market
At Schroders' annual investment conference for intermediary clients, held in London, fund managers exchanged views on a number of topics impacting markets around the world. Here, we round-up their insights on the current investment environment.
Marcus Brookes, Head of Multi Manager, comments on the recent quantitative tightening policy introduced by the Federal Reserve
“Janet Yellen recently announced the Federal Reserve was going to introduce a new policy called quantitative tightening. This is very different from quantitative easing; which is where the Federal Reserve created brand new money, around $3.5tn to go and buy financial assets, principally government bonds, to suppress interest rates across the entire economy. By reducing those interest rates, it should induce us to go and borrow more money because it’s much cheaper to borrow, and, if one man spends money because he’s borrowed some, then it’s another man’s income, and that’s good for the economy. In reality though, there was too much debt following the financial crisis, so borrowing didn’t really happen irrespective of the level of interest rates.
“$3.5tn is a lot of money, if you were to spend $20 a second, every second of every day, every day of every month and so on and so forth, how long would it take you to spend $3.5tn at that rate? The answer is around 5,500 years, so for you to be finishing around now, you’d have had to have started around the year 3500 B.C. Quantitative easing has now ended and, Janet Yellen is looking at quantitative tightening, so instead of putting money into the economy, she’s taking money out because everything appears to look fine with the economy; unemployment is low and growth is pretty good. Yellen has said she is going to introduce quantitative tightening in batches - around $10bn a month for the next 2 or 3 months, then $20bn, then $30bn, then $40bn, then $50bn - these are very significant numbers. If you agree with us that quantitative easing pushed asset prices up, maybe we’re going into a slightly different environment now.”
James Sym, Fund Manager, European Equities, comments on whether inflation is coming back to Europe
“Is inflation coming back in Europe? I think it’s fair to say, compared to the hopes we had at the end of last year, inflation expectations have come back down, and that has very big implications for a lot of the assets that we buy. Bond yields have fallen again and those stocks in the European equity market that benefit from that have done very well recently. When I look at market data, there’s nothing to me that suggests we should change our view. Ourstrong view is that over time inflation is coming back, and it’s coming back big time. For that reason, people need to make sure they have a portfolio that will benefit from that. I’ve been buying financials, telecom stocks and other stocks which I think are the beneficiaries of that. What’s interesting to me is that a lot of portfolios are not positioned in that way and actually had quite a tough time in the second half of last year. I’m trying to encourage people to have a look at their portfolios and think 'have I got the right stocks, the right portfolio to benefit from a rising bond yield environment if that is what will come to pass in the next 2-3 years?' which I think is very likely.”
Andrew Rose, Fund Manager, Japanese Equities, discusses the recent snap election and what this means for Japan
“2017 was already shaping up to be quite an exciting year in Japan and now we have the added excitement of a snap general election in October. So far this year, we’ve seen quite a gradual but consistent improvement in economic data in Japan, including the sixth consecutive quarter of GDP growth – the first time that’s happened in Japan for more than 12 years. That’s also leading to quite a robust recovery in corporate profit growth, but investors have overlooked this because they’ve been focused on the global risks; for example what’s happening in the US and what’s happening particularly with the tension around North Korea. Mr Abe has had some of his own problems in the last few months, but recently he’s seen a really strong rebound in his own popularity and that’s encouraged him to go to the polls with the general election. Nothing is of course certain these days in election outcomes but we think we could be looking at another period of political stability in Japan, a continuation of Abenomics and a continuation of the very supportive policies that have done well for the equity market so far.”
Alex Breese, Fund Manager, UK Equities, comments on the outlook for the UK market and where he is currently finding opportunities
“Survey data shows that asset allocators are underweight UK equities, primarily because of the risks Brexit poses to the economy and also the unstable political backdrop. However, it is worth reminding investors that only a third of the UK stock market is exposed to the UK economy. Although we remain cautious on the outlook for the UK economy, we are starting to find some domestic opportunities emerge as we note that a lot of this negative sentiment and uncertainty is reflected in sterling weakness, in GDP forecasts, in relative earnings revisions and crucially in low valuations. Outside the domestic part of the market, we’re finding opportunities in sectors like financials and commodities; here we see a combination of low expectations, cheap valuations and fundamentals that are generally improving. Conversely, we are far more cautious on the outlook for the consumer staples sector, where we see high expectations, expensive valuations and fundamentals deteriorating as organic sales growth is declining and we are also seeing increasing levels of debt as management teams pursue risky merger and acquisition strategies.”
Hugo Machin, Co-Head of Global Real Estate Securities, looks at the impact data centres are having on global cities
“We know not all cities are equal and we know that there are certain cities we think in the future are going to be much stronger than others, but within that, we also think there are elements of real estate sub-sectors that are not created equally either. One area that we look at and have particular interest in is data centres. We know that the demand and the creation of data is a trend that is growing very strongly; in fact, every 2-3 years, the amount of data that is produced through new technology is doubling and this data needs to be housed and transferred through data centres. These data centres need to be located in and around some of the world’s strongest cities. We are seeing a very strong element of demand from two industries in particular. The two industries that we are looking at are the gaming industry and high frequency traders – it’s this reduction in latency and the need to be on these super fibre highways which is really driving this demand. Our view is that you need to be positioned in the strongest global city but also in very specific sub-sectors in terms of real estate in those global cities.”
Mike Scott, Fund Manager, Fixed Income, comments on where he is seeing opportunities in the global high yield market
“On a forward looking basis, we do think that the outlook for global high yield is quite an attractive one. We think that the global economic outlook is currently relatively robust. That said, we are finding certain parts of the globe more attractive than others. If we take a look at the European market for instance, it has typically had stronger credit fundamentals than the US of late, however, we feel that this is more than priced into the market, therefore we’re looking slightly further afield to parts of the US for instance. We think the oil and gas sectors are attractive and also retail; specifically some parts of US retail, which are certainly suffering from some quite strong secular headwinds, are very attractive at these levels.”
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*as at 30 June 2017