Recovery and earmings growth offer opportunities for equity investors – Aviva Investors

Aviva Investors Multi-Manager Equities survey highlights positive sentiment towards economic recovery, but hints at negativity around market uncertainty

Conducted in January 2014, the Aviva Investors Multi-Manager Equities Survey asked fund managers with around £3trn of assets under management for their views on markets, including return expectations and likely macro-economic influences for 2014. The respondents were based in the UK, US, continental Europe and Asia-Pacific.

Market uncertainty and macro-economic issues continue to be listed as the biggest risk facing equities, with 35% of respondents indicating that this was their biggest challenge for 2014, followed by valuations at 31%. This contrasts with 2013 that saw 61% indicate that market uncertainty was the biggest risk, followed by inflation. 9% of respondents claimed that valuations were the biggest risk in 2013.

Just 8% of responses expect flows into equities to decelerate for 2014, with the vast majority (62%) expecting an acceleration.

There was a complete turnaround on the subject of the eurozone, with 74% indicating that eurozone issues would not affect the markets negatively this year, compared to 29% last year. In the 2013 survey 71% suggested that Eurozone issues would negatively impact the market. However, previous fund manager predictions that IPO activity would grow and that emerging markets would experience between 5-10% growth were both borne out over the past two years.

Economic recovery and strong earnings growth represented the biggest opportunity for equities in 2014 the survey found, with 65% of respondents highlighting that progress would be largely driven by top line growth. In 2013 the top answer was an increased focus on equity valuations, relative to bonds, highlighting the changing market conditions.

On the issue of GDP, 33% of respondents expected it to be highest in the Emerging Markets, with US achieving 31% of the vote. Asia accounted for 25%, with UK and the eurozone combined accounting for just 11% of the vote.

Mid-caps were expected to achieve the best performance in 2014, with 41% of respondents indicating that this was the sector expected to do the best. Large caps achieved 35% of the vote, with just under a quarter (23%) expecting small caps to be the best performer for 2014.

Ian Aylward (pictured), head of multi-manager research at Aviva Investors, said: “I am particularly interested to see that respondents still expect mid caps to outperform despite the strong run they have enjoyed over recent years.

“This tallies with the positioning of the majority of the external managers that we use in our products – with managers citing to us their expected superior growth prospects despite elevated valuations.”

On the question of ‘what is your expected return for the mainstream equity index in 2014 in: UK, US, eurozone, Japan, GEM’. GEM was the only sector where the most likely return was between 0-5%, accounting for 37% of the vote.

Equity managers
– Were in agreement that IPOs would continue to dominate the agenda in 2014, with less than 5% suggesting that there would be less activity than in the previous 12 months.
– Indicated that the financial sector (51%) would continue to drive performance, along with industrials (41%), technology (34%) and consumer discretionary (31%).
– On expected returns for the mainstream equity index, between 6-10% was seen as the most likely return, accounting for 47% of the vote for the UK, 46% of the vote for the US and Japan and 44% for the Eurozone.

Peter Fitzgerald, head of Multi-Assets at Aviva Investors, said:
“It is interesting to note the consensus view is that developed market equities will outperform emerging market equities in 2014. This is particularly interesting given many investors actually expect better economic growth in Emerging Markets. Our portfolios are overweight equities and remain overweight developed markets but we are seeing some value starting to appear in some emerging markets.
“It is also clear that respondents believe the weight of money will continue to support the markets despite an expected increase in IPO activity.”

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