RUPERT WATSON, asset allocation specialist at Skandia Investment Group on Asset Allocation
We expect equities to rally over the remainder of the year and believe the rally will be driven by ongoing economic growth, attractive valuations and low interest rates in the developed world. We expect emerging markets to outperform developed markets, with the Asia Pacific region leading the way.
There have been some signs the global economy is slowing, especially in the manufacturing sector. While manufacturing is likely to slow further, the global economy should continue to perform well, boosted by low interest rates and a corporate sector flush with cash. While much attention has focused on some of the weak data coming out of the US, Europe has been much stronger than expected, with Germany growing at its fastest pace since reunification. While expectations for growth in the US have been revised lower, global growth expectations remain above trend. This economic growth should continue to fuel corporate earnings growth, which in many countries is growing at the fastest pace in years.
Equity valuations are attractive, especially versus other asset classes such. Dividend yields are well above cash yields, while they also exceed bond yields in some developed countries, which are at or close to all-time lows in some places. This should lead to flows into equities from cash and bonds.
The low level of interest rates in most developed countries should boost both equity markets and economic activity. We continue to prefer EMs over developed markets. Most EMs are growing faster than developed markets, while they generally have less debt. Within the emerging world, we are attracted to the Asia Pacific ex Japan region. Over the past nine months, the region’s equity markets have been held back by the prospect of monetary tightening in China and fears this will cause a slowing in growth. The growth slowdown and signs inflation may be close to peaking should allow Chinese authorities to stop tightening monetary conditions. This should lead to growth picking up into the end of the year.
At the start of the year, hopes had increased the recovery seen in the global economy and financial markets signalled the end of the crisis. Problems in Europe led some to believe we had merely reached the end of the beginning, not the beginning of the end. We think the European and global authorities will do whatever it takes to ensure the recovery continues and stability is maintained. While fiscal tightening in many parts of the developed world represents a serious headwind to growth, the low level of bond and interest rates is very supportive. This should enable equities to continue to climb the so-called ‘wall of worry’.
Rupert Watson is asset allocation specialist at Skandia Investment Group
