Moving in Asian and European equities
It already feels like a long year! Clearly markets have had much to contend with, but the dominant feature has been the continued collapse in core bond yields.
Global economic activity remains muted, and the deflationary forces lowering inflation, and impacting nominal growth are many and varied. Both politics, and geopolitics continue to grab headlines and, in the case of the Greek election, have the potential to significantly impact markets given the Greeks’ conflicting ambitions to remain in the Euro while seeking forgiveness on their debt. The oil price remains weak, and whilst the impact on inflation is clear, the follow through in spending is less clear cut. Finally, the ECB has announced full blown sovereign QE, with an intention to purchase €60bn a month in bonds until its target level of 2% inflation is reached.
Against this backdrop, yielding assets have had a strong start to the year. Credit, particularly investment grade, has performed well. Similarly equities have largely enjoyed positive returns. Our equity strategy has been to favour the US, which has enjoyed a relatively stronger economy; the UK which has valuation support; and Japan where Abenomics is boosting corporate profits. Although the UK has been held back by its exposure to energy and materials, both Japanese and US equities have performed well. The US equity market’s valuation overall now looks relatively stretched given both its outperformance, and more worryingly, the impact of a stronger dollar on profits.
Europe on the other hand is enjoying a number of decent tailwinds; a weaker Euro, lower oil price and a boost from the QE programme. It is quite possible that we will see upward revisions to GDP growth in Europe this year, a first for many years. Corporate profits will be supported by improved competitiveness as a result of the currency, and valuations are relatively lower. Interestingly, earnings revisions have just turned positive, albeit in a very small way.
In Asia, following a long period of underperformance, valuations are looking more and more attractive. Whilst there a number of obvious losers in the region as a result of the oil price fall, there are many winners and we are increasingly finding interesting investment opportunities. As a result we have moved overweight the region for the first time since 2013.
As a consequence, we have moved overweight in both Asian and European equities, funding both of these moves by taking our US equities exposure to neutral.
Mark Burgess is chief investment officer at Threadneedle Investments