US natural gas one of themes of Threadneedle’s Burgess

US manufacturers are on the radar of Threadneedle Investment’s CIO Mark Burgess, as abundant cheap natural gas is giving energy intensive manufacturing a major cost advantage.

The equity market rally continued through February, driven by some encouraging economic news and a degree of progress with regard to Greece. In addition, there was an expectation that the ECB’s second Long-Term Refinancing Operation (LTRO), at the end of the month, would give further support to the banking sector and offer a general boost to liquidity. In the event, the latter proved slightly more substantial than anticipated with a €529bn take-up by the banks of this very cheap money from the ECB. This will be a significant help to the funding of European banks and is also likely to increase their sovereign bond purchases, thereby assisting in keeping yields down.

We see the LTROs, the recent £50bn extension to quantitative easing by the Bank of England and the ¥10trn increase in the Bank of Japan’s asset purchase scheme as activities that boost liquidity and are likely to increase demand for equities.

Furthermore, recent Q4 corporate results from around the globe have been healthy and show high profit margins and cash flows being maintained. Finally, valuations remain attractive on a medium-term view relative to history and other assets. For these reasons, we continue to keep an above-benchmark position in equities, although following such a strong rally, short-term consolidation would not be surprising.

Markets we like include Asia and emerging markets which are benefiting from high levels of economic growth relative to developed economies and increasing signs that a period of monetary easing is close, following the successful containment of inflationary pressures. UK equities appear attractive despite the difficult economic outlook. A high proportion of earnings come from more buoyant overseas regions, valuations are low and dividend yields and growth are currently running at high levels. We also like the outlook for US equities, where the crucial housing and employment data appears to be improving and demographics are superior to other developed markets. In addition, the very low price of natural gas is giving energy intensive manufacturing a significant cost advantage that will be sustainable and is likely to give rise to a wave of capital investment.

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