April 2017

MARKET WATCH: Where the smart money is going

With the global economy expected to deliver synchronised growth in 2017, experts in some of the major asset classes share their market comments with Funds Europe. EUROPEAN EQUITIES Didier Saint-Georges
The managing director of France’s €56 billion asset manager, Carmignac, says: “Equity markets can look back on yet another month of solid gains, despite the political uncertainty, prompting us to maintain our equity exposure at close to the maximum allowed level. “Europe posted a particularly strong rally in March, with the leading eurozone market indices adding anywhere from 3% to 8%. “Due to the high international exposure of Europe’s listed companies, the cyclical nature of their businesses and the discounts they continue to trade at, the prospect of a synchronised global economic recovery has given European stocks a powerful boost. “We have accordingly upped our exposure to this theme. Taking advantage of exaggerated concerns over possible fines related to its diesel emissions tests, we initiated a position in Renault. “The French carmaker’s geographic mix makes it much less vulnerable than Volkswagen, a firm with a major presence in the United States.”
US EQUITIES The global asset management company Columbia Threadneedle has recently reduced the weighting of US equities in its multi-asset portfolios from neutral to underweight. Toby Nangle
The head of multi-asset for EMEA believes the pullback from the US stock market is now justified. “Global equity markets are near all-time highs, bond markets are relatively calm and currency volatility is reasonably low,” he says. “This benign state is being fuelled, at least in part, by optimism about the US economy, coupled with reduced fears of an ongoing swing towards populism in Europe. In early-March we decided to downgrade US equities from neutral back to negative, though we remain neutral on equities overall (and currently favour Japan and Asia ex-Japan). A US equity market correction is, on balance, likely to be positively correlated with fixed income, especially US government bonds. It is worth noting, however, that while the Fed has brought forward the timing of its rate hikes with the recent rise, it is not expected to increase the magnitude of further rises.”
OIL Pieter Schop
The senior portfolio manager at NN Investment Partners says elevated oil production levels by Opec members ahead of production cuts is only now landing at the destination ports, and that the US receives a disproportional share of the glut. “Once cleared, the rebalancing process is expected to start. On top of this, a strong macroeconomic outlook... should bode well for oil demand... But there are a number of counter forces.”
The senior emerging markets strategist at NN Investment Partners says a sharp rise in the financial conditions indicator (up from 0.08 in February to 0.56 in March), combined with the strong export performance, increases the chance that domestic demand growth will also start improving in the coming quarters. “We continue to believe that the room for a widespread domestic demand recovery is limited because most emerging economies are in a steady deleveraging trend after a long period of excessive credit growth,” he says. “But easier financial conditions must have some positive impact on consumption and investment growth.” He adds: “While we acknowledge that doubts about US reflation could potentially affect emerging growth expectations, particularly because emerging markets’ domestic demand growth is still weak, we also think that a stumbling Trump makes far-reaching protectionist measures more unlikely. “Without the protectionist fears in the market, emerging markets probably would have performed much better than they have already done in the past months. “So, with every failure of the US president to get his proposals accepted and implemented, investors are likely to get less worried about import taxes and other obstacles for emerging markets exporters to sell their goods in the US.”
GOLD James Luke
The commodities fund manager at Schroders says commodities such as gold and silver are primarily an inflation hedge. Given quantitative easing, he says, “there is every reason to argue that higher inflation is coming in the future. “Gold and silver investments in particular remain very under-owned. Some investors think the prospect of an increasing base interest rate in the US is reason alone to avoid these types of investments.” Although past performance is not a reliable indicator of future results, “the gold price has tended to rise from the beginning to the end of Federal Reserve hiking cycles. In three of the last four instances when the Fed embarked on a hiking cycle, gold saw 10% to 20% returns from beginning to end.”
FIXED INCOME Richard Turnill
BlackRock’s global chief investment strategist attributes its recent decision to downgrade European fixed income to underweight to high valuations and an improving economic outlook. These factors “make us cautious, and we prefer equities and fixed income opportunities elsewhere”, he says. “European bonds do not reflect the region’s better growth, we believe. Central bank purchases, investor yield-seeking and safe-haven flows have driven down yields on government and investment-grade corporate bonds. Eurozone credit spreads have compressed well below those of US peers. As a result, eurozone bonds seem pricey.” ©2017 funds europe

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