Schroders: Our current thoughts on the global market
At Schroders' annual investment conference, held in Edinburgh, fund managers exchanged views on the current markets around the world. Here, we round-up their insights on what has been a challenging start to the year.
Matt Hudson, Head of Business Cycle, UK & European Equities
“It’s been a fascinating time to be a UK equities investor. For the first quarter in many we have seen a complete rotation in what is driving the market. Having been in a period when growth, growth defensives and consumer cyclicals have performed well we are now seeing a rally in value and an underperformance in growth. This is partly because emerging markets have begun to stabilise and commodity prices are going up. We think there is a great short term opportunity in increasing weighting to industrial cyclicals as we get a restocking bounce and also even to financials in the slowdown phase. We think financials are at a big discount to fair value to the market and to other value type assets. However, we are still in the slowdown phase and we must make sure that our overall portfolio positioning remains defensive. Corporate profitability has already peaked and we have seen signs of stretch on corporate balance sheets and capital ratings coming through as well.
From an income prospective we still see positive levels of dividend growth coming from the UK market this year although levels of cover have reduced.”
James Sym, Fund Manager, UK & European Equities
“Within European equities I would say that the best opportunities over the next 12-18 months are going to be in the value end of the market. This is a part of the market that has underperformed hugely over the last five or six years since the financial crisis and it has underperformed so much that a lot of these stocks are now quite cheap. I am buying companies like banks, insurance stocks, commodity sensitive businesses and telecoms that are perhaps a little bit economically sensitive but where I think I can get cash flow.
Looking at the other half of the market – the growth market – where most European investors are focused and where most European funds are invested. I actually find those stocks quite expensive for what they are. So I think there is a huge dispersion and a very interesting opportunity set in European equities between value stocks which are very cheap and look very attractive and then growth stocks which are over valued.”
Gareth Isaac, Senior Fixed Income Fund Manager
“Despite a volatile beginning to the year I still think the outlook for risk assets within fixed income remains relatively constructive, at least in the short term. The beginning of the year was characterised by a spike in volatility in the fixed income markets and a broad sell off in risk assets. The primary cause was the continued strength of the USD and the impact on commodities. The dollar strength can be attributed in part to the expectation that the December rate move by The US Federal Reserve would be the first of a series of hikes. The market began to turn in mid-February as we heard more soothing rhetoric by the FED and those rate hike expectation began to be paired back. As a consequence commodities began to reverse the losses of January and fixed income risk assets such as high yield and Emerging Markets rallied sharply. I suspect we are now going to go through a period of consolidation as we head through the summer months but if we begin to see an improvement in US economic data following a weak first quarter and the re-emergence of a more aggressive monetary policy then volatility is likely to pick up again.
I think the key for fixed income investing in the current market conditions is to be flexible because market movements can be much more extreme than they were pre GFC. It can be very expensive to source liquidity during a market panic so we now run a lower level of structural risk than would have been the case a few years ago, keeping some powder dry to take advantage of market volatility and buy bonds when prices overshoot to the downside.”
Jenny Jones, Head of US Small & Mid Cap Equities
“I’m finding some mispriced growth opportunities in technology which is very tough right now because a lot of areas of technology are commoditising. However, if you have heard about the data services that are being built, for example AWS (Amazon Web Services) and Google, what they need is optical systems. So we used to talk about semi-conductors all the time but right now I think there is a long term trend and opportunity for optics and there are several opportunities within the small cap market that I think are mispriced because typically it’s been a very cyclical industry and people haven’t thought of it as a large addressable market. In fact if you look over the template for the next five to ten years there are some great opportunities to be found.”
Keith Wade, Chief Economist & Strategist
“The world economy has not made a great start to 2016, we have seen forecasts being downgraded and growth expectations being disappointed. We do think though that going forward as we go into the summer that there are some signs that growth is picking up and that the problems that were holding back some companies earlier in the year are beginning to fade a little bit as what we call the inventory cycle begins to turn. The other thing that is beginning to improve is on the consumer side – we are beginning to see credit grow again. So growth is probably going to be a little bit better going forward but we have to say that for the world economy as a whole, we do think that global growth isn’t going to be that strong and this has been the fifth consecutive year that global growth has disappointed those initial expectations so we have to ask ourselves why that is and I think a lot of it is to do with the aftermath of the global financial crisis. It is taking a long time for households and companies to adjust to the new environment; it is taking emerging markets a long time to adjust to this new environment so there are continued pressures that we continue to see. I think demographics have got a part to play as well, there has been a slowdown in growth of working population in the US and finally productivity has slowed down as well. So yes things are looking a little bit better than there were at the start of the year which is good news but the longer term outlook is still going to look quite tough.”
Nick Kirrage, Fund Manager, Equities
“One of the interesting things about the UK equity income market is that everyone wants it, everybody wants income. And of course when everybody wants something it becomes expensive, which hurts your ability to make money. When we look back over 20-30 years at the number of stocks in the UK market, that yield more than the market itself, it is now at 30 year lows. That is to say that despite the fact that the dividend yield for the market as a whole looks reasonable, it is being held up by a handful of very high yielding, very large, stocks. Whereas if you look at the rest of the market those stocks on average tend have a much lower dividend yield. That makes it very hard for income fund managers to find good ideas and individual stock stories. This should focus income funds to look at some of the bigger companies, such as HSBC and BHP Billiton, where fund managers have to be braver. This is where we are focusing today to generate income for our clients.”
Paul Marriage, Head of UK Dynamic Small Cap, Equities
“The outlook for small caps today is dominated by the UK referendum, which is no great surprise. There is not much of a ‘bromance’ between UK small cap - the riskiest end of equities - and a big uncertain event like the UK referendum. So what might happen? I think the market will be pretty good at pricing in the potential risk of the UK leaving the EU so markets might be weak then but they could drop again after that. There will be some great buying opportunities in long term small caps if that is the case. If we were to stay in then the chances are there will be a post referendum ‘risk on, everything is ok’ certainty type rally. Small caps will do well then; they did very well in the same scenario last year after the UK election. These are the two ways it could pan out, both slightly different, but in the end not quite so bad for the small cap sector. Interestingly companies are pretty sanguine. No-one is jumping up and down saying the world is fantastic. There are patches of weakness everywhere in Asia, US and even the UK consumer isn’t that strong but I think UK expectations are modest this year and on a forward earnings multiple of 12.5 times that is not too rich for UK small caps overall. So we are feeling modestly optimistic about the situation, mindful of the many bricks in the wall of worry.”
Tom Walker, Co-Head of Global Real Estate Securities
“Whether you are running a global real estate fund, a UK real estate or a European real estate fund the one key ingredient you have got to find is GDP growth. Without economic growth you are not going to be able to charge your tenant a higher rent, whether they are an office company, a shop or an industrial unit.
We believe that there are certain cities around the world, and we refer to these as global cities, such as Los Angeles, New York and London, that are detaching away from the countries and regions they are in. These very powerful global cities will continue to perform very well by virtue of high quality infrastructure, very diversified economies and talented work forces. This is why we try and gain as much exposure as we can to these global cities.”
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Notes to Editors
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