The return of Goldilocks

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Paul Niven, head of Multi-Asset Investment at F&C Investments, reflects on Q2 and current overweight or underweight positions:

Q2: A significant recovery in global growth

  • Recovery was led by the US economy, and most indicators suggest a steady improvement is on the cards for the remainder of the year. But equities and credit markets have, arguably, run ahead of fundamentals and now face the scenario of either better growth, and earlier rate rises, or slower growth, and disappointing earnings
  • US: Fundamentals now are pointing to improving growth, with less fiscal austerity, accelerating credit growth, more capital reinvestment and faster construction activity. With survey data and employment growth both strengthening, third quarter growth could well beat expectations
  • We remain overweight the US

After two years of contraction, the eurozone will see growth in 2014, albeit at a pedestrian rate

  • Indeed, GDP remains below pre-crisis levels as some disappointing performance from the core economies, such as France, has offset the welcome rebound seen from a number of the embattled periphery nations
  • Investors will be hoping that the loose monetary policy employed by the ECB to counter ultra-low inflation will take the heat off the Euro. The single currency has remained strong and any depreciation will be helpful to the region’s under-pressure exporters
  • These concerns have led us to trim our overweighting of the market to neutral

It is still a little too early to become more constructive on the emerging markets

  • Even though fundamentals for the ‘fragile five’ are improving and the case for investment has improved. The brighter performance of emerging stocks this year has, in part, been a function of falling US bond yields. However, the reacceleration of US growth combined with slightly higher inflationary pressures should see yields rise again and staunch the recent flow of capital into the emerging markets
  • We also remain wary that the structural challenges facing emerging markets will once again resurface to unsettle investors later in the year

Asset Allocation Summary

  • We have moved our Europe (ex-UK) Equities position from overweight to neutral as recovery is broadening but not accelerating and industrial production numbers in Germany have been disappointing
  • We have maintained our overweighting of index-linked bonds, global high yield and emerging market debt due to the demand for inflation protection is starting to rise, interest rates look set to remain low for some time yet, thus supporting the demand for high yield and Emerging market bonds are benefiting from improving investor sentiment towards developing economies in general and the ongoing search for income
  • We remain neutral convertibles as improving economic growth combined with easy monetary policy by central banks should be supportive of equity markets, which in turn will underpin convertibles, however the main risks are geopolitical in nature and include the crises in Iraq and Ukraine
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