F&C’s Paul Niven sees nervy start to the year
Paul Niven, head of Multi-Asset Investment at F&C Investments, has outlined the manager’s latest views on asset classes.
When there is tangible evidence of a turnaround in the global economy, it is usually the time to be investing in equities. More than five years after the start of the financial crisis, the recovery of the US and the UK is more or less established and there are signs of improvement in Europe and Japan.
But the chances of this good news translating into another year of impressive equity market returns will depend on how adept the central banks are at weaning the major economies off monetary stimulus. Riskier assets such as equities have been kept buoyant by the tide of cheap money and any signs that policy will be
tightened more aggressively than expected will unsettle confidence.
Improving economic data could then start to fuel concerns about interest rate hikes and investors will need to steel themselves for bouts of share price volatility as the policy makers change their rhetoric. Markets are adjusting after the crisis and there are likely to be bumps along the road to more ‘normal’ monetary conditions.
2014 has started in lacklustre fashion as investors have monitored central bank policy statements and an uninspiring series of economic data from the major economies. One of the biggest concerns has been China. Investors are fretting that the world’s second largest economy is misfiring and worries about the growth outlook are compounding existing concerns about emerging markets in general.
China faces a difficult transition to a lower growth trajectory and investors are being more realistic over strategic challenges for the new authorities there. Nonetheless, policymakers have proven adept at maintaining respectable headline rates of growth and avoiding financial slip-ups to this point. Concern that this historic success has been achieved through over-investment and a gradual erosion of competitiveness is now widespread. However, in terms of the outlook for financial assets, we are encouraged by solid profits growth we are seeing across the market and extremely low share valuations.
The year has also seen heightened geopolitical tensions, most notably in the Ukraine as Russia moved to annex the Crimea. It has been noticeable though that markets outside Russia have not been not been particularly sensitive to the events thus far, with even oil prices staying stable. Only if the situation escalates will we know whether markets are under-pricing this type of risk.
The global economy appears to be on a path of slow but steady growth for the next couple of years and inflation is expected to remain low. This should create a supportive environment for riskier assets. Tactically, we remain overweight equities as we are bullish on a number of key fundamentals such as earnings growth. Risk appetite is also improving once again.
We have maintained our overweighting of Europe ex-UK, despite the uncertainties created by the crisis in Ukraine/Crimea. Although the strong euro represents a threat to exporters, we continue to see good economic upside. Elsewhere we have moved our US equity position from underweight to a small overweight, funding this move by trimming positions in the UK and Japan.
In the fixed income markets, we remain underweight sovereign bonds. The recent soft-patch in the US economy has pushed value out of sovereign debt. Once investors convince themselves that the recovery is indeed progressing satisfactorily, yields will be forced to rise.