Managers ponder what is in store for year ahead
InvestmentEurope has rounded up some of the views of what the current year could hold for investors across both traditional and alternative asset classes.
David Lashbrook, head of Africa Investment Strategies at Momentum Global Investment Management (below), suggests that there are some good reasons to believe that African equity markets will continue to perform as well or better than developed markets through 2014, despite the challenges emerging market equities faced in 2013.
Firstly, pension and insurance reforms are creating locally based institutions that will be natural buyers of local equities. Secondly, specialist African equity investment managers hold a significant portion of the free float. These managers typically do not trade their portfolios actively, so this should offer some resistance to price depreciation off the back of a draining of liquidity, Lashbrooks notes.
And despite 2013’s strong rally, there are still pockets of value seen in Africa. Most Nigerian banks are still trading on single digit price earnings ratios and some even have a price to book ratio of less than one. Cement manufacturers also look interesting: they are unquestionably a beneficiary of Africa’s exploding consumer base although they are not priced as richly as many of the consumer stocks.
Nicolas Simar, head of the Equity Value Boutique at ING Investment Management, says the next 12 months should be good for European equities and value stocks.
“Over the last five years, quality has been given a growth premium and non-cyclicals have seen their weight increased within the growth style,” Simar says The breakdown of sector differences between ‘value’ and ‘growth’ clearly highlights the dominance of food and beverage, healthcare and personal and household goods in the growth style.
These are non-cyclical industries with low and stable rates of growth that make them vulnerable to a European recovery, even a mild one. ING IM expects the rotation from good quality growth towards value to continue in Europe as bond yields rise while good quality growth companies still trade at an extreme valuation premium relative to value stocks following five years of significant rerating.
At the same time, ING IM predicts some pressure on earnings revision trends. The investment manager notes that those companies – mostly concentrated in industries like consumer staples, consumer durables and health care – typically show underperformance versus the market in a rising rates environment as their equity duration is significantly higher compared to the value side of the market. Furthermore, they share, on average, a significant exposure to emerging market economies that are typically the first casualties of rising US bond yields, as was seen during the first half of 2013.
The same environment of rising bond yields is supportive of the high dividend yield side of the market. High dividend yield stocks in Europe are short duration and have a higher domestic exposure compared to quality growth stocks while low dividend yield stocks tend to underperform their high dividend yield peers in a rising bond yield environment. High and sustainable dividend yields can be found in banks, insurance, energy, utilities, basic resources and construction and material sectors.
Chris Wallis, chief executive officer at Vaughan Nelson Investment
Management (below), believes that the US stock market will be subject to similar drivers as in 2013.
This means sluggish growth, no real industry trends leading the way and nothing really lagging. However, he does think equity prices will be supported by quantitative easing. “The Fed has made the clear choice that they’re not interested in tapering, much to the surprise of the market.
“It is the implication of increased liquidity, that will likely provide a positive backdrop for equities, and US equities specifically,” says Wallis.
If the Federal Reserve does move forward with tapering, Wallis expects it to pressure certain areas of the market, but he believes active management has the potential to do well.
“We think the equity indices can remain challenged for several years, but there are still great opportunities in individual securities,” said Wallis.