LONDON, 08-Jun-2016 — /EuropaWire/ — At a recent Schroders investment conference fund managers discussed where they are seeing pockets of positivity in the market and what their hopes and concerns are following a volatile start to the year.
Marcus Brookes, Head of Multi Manager
“The worry I have is that we are towards the end of a pretty powerful bull market in a lot of assets. The bond market, for example, now looks incredibly expensive. The US equity market – which has been phenomenal – has seen the most powerful bull market in US history but can this continue? On one hand you have China which could be an economic upset and on the other you have the US which could just be profitability declining and a bit expensive – either way investors should watch out.
My hope for the market is the ongoing recovery in the US economy stays on track, which would allow the rest of the world to emerge from a period of tepid growth. The obvious beneficiaries from this would be the Emerging economies, who actually appear to be turning around quite nicely.”
Andrew Rose, Fund Manager Japanese Equities
“The impact of China on Japan is something that worries me. This was a big part of the fear seen in the market at the start of the year. People have got more relaxed about China and that, at some point, might be proved to be misplaced. So with this in mind the thing that keeps me awake at night is a possible hard landing in China.
Looking forward my hope for the market is that the trend towards greater shareholder friendliness in Japan is maintained in spite of a more difficult profits backdrop.”
Matt Hudson, Head of Business Cycle, UK & European Equities
“My main worry is central banks. Policy responses are likely to become ever more aggressive due to limited global growth and investors are now wondering what the central banks are going to do next. One possible scenario is that central banks become renationalised, meaning that independent policy making will be removed. Before this potential outcome raises its head there is likely to be an uncomfortable period, probably culminating in a crisis.
“On a positive note after a sustained period of pressure on the earnings base of UK plc we are beginning to see some signs of a more stable period ahead, which should see UK equities start to deliver better performance especially against other global equity markets. Despite the known income challenges we can still expect many companies to grow their dividends particularly in value sectors such as Financials (banks and insurers). Underlying these themes we hope that there will be better balance between companies growing their real capital base and giving it back to shareholders via special returns of capital, which will result in a better balance between the needs of investors now and those in the future.”
Alex Tedder, Head of Global Equities
“The elephant in the room for me is the amount of debt globally. Global debt has just gone up in a straight line since the financial crisis and part of that is due to monetary stimulus. I don’t think net negative interest rates end well and we need inflation to come back. If we don’t get inflation, for whatever reason, then the outcome for economies, and markets, is likely to be quite negative.
For us, positives for the US and for Global Markets revolve around three things. Firstly, although valuations are far from compelling relative to recent (10 year) history, relative to other asset classes equities look reasonably well supported. Even the S&P500, which is a low-yielding market, is supported by a dividend yield of around 2.2%, about 50bps above the Treasury yield. Against that backdrop, equities look more appealing. Secondly, the US recovery, whilst certainly sub-par in an historical context, is definitely on track. Recent retail sales data show that strong employment and positive wage growth is feeding into consumption and the real economy, and this is expected to continue. In Europe, despite still very mixed headline data, underlying metrics have begun to inflect positively; for example in Spain, where industrial production and employment are both showing clear improvement. Asia remains mixed, with China decelerating, but should begin to show signs of stabilization on year on year revenue comparisons in the latter part of the year. Overall therefore, whilst by no means stellar, global growth should be enough to support equity markets over the next 12-18 months. Thirdly, following a protracted period of relatively disappointing returns, expectations for earnings are now quite low. Quarter one reported earnings from US companies in aggregate have comfortably beaten these lowered expectations as companies have started to increase prices in many cases and have leveraged cost cutting initiatives. In the second half of the year, year on year revenue comparisons for the S&P are comparatively easy on both an organic and headline basis. We believe that core inflation is already rising, particularly in the service sector, and we foresee better pricing power going forward. Earnings growth could exceed expectations as a result.”
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