The turning point

In a warm-up to the forthcoming Senate Investment Conference, some participating fund managers discuss the ever-changing investing environment

The global economy is at a turning point. There are signs the recession is over the worst - industrial output is picking up, house prices are stabilising, consumers are returning to the shops. But unemployment remains stubbornly high and confidence weak. Even if there is a recovery, fears remain of rampant inflation further down the line, forcing interest rates higher and creating a 'double-dip' effect. Markets have had a good run up this year, but may not hold their ground if the economy takes a turn for the worst.

The Senate Summer Investment Conference in Monte Carlo aims to bring fund selectors a range of views to negotiate this complex inflection point. There is a broad spectrum of asset classes represented, from UK equities, to fixed income, to emerging markets, and each manager has their own take on the recovery potential of the global economy.

In the UK, Jeremy Smith, head of UK equities at Neptune, is optimistic on the recovery and is even making tentative moves back into unloved areas such as real estate. He bases his optimism on encouraging economic data, including the Chinese Purchasing Managers' Index and the Baltic Dry Index. Meanwhile, volatility has reduced and the oil price has risen. However, he will also talk about how he is maintaining a focus on quality in the funds to defend against further bouts of market volatility. Audrey Ryan, portfolio manager Aegon Asset Management, is also becoming more optimistic and has been tentatively increasing her exposure to recovery stocks.

Simon Murphy, manager of the Old Mutual UK Select fund, will be looking at whether we are at the start, middle or end of the current bear market. Based on that, he will examine whether it is time to start bottom-fishing in the most bombed-out areas, such as financials. He also asks whether the commodities super-cycle is still an influence on markets.

Adrian Gosden, co-manager of the Artemis Income and High Income funds, will examine the dilemma for many equity income managers: there are currently good dividends available from defensive areas of the market, but markets are shifting their attention to less stable cyclical stocks in expectation of an economic recovery. Is it time to switch and risk capital loss if the market takes another downturn or risk underperformance?

The US market has traditionally been the first to benefit from a recovery and the Senate programme features two US managers. Christian W. Pachtner, director of US equities at RCM Investors, says investors face a new reality - one where hedge fund returns are correlated with equity-market returns and where frozen debt markets and counterparty failures cast shadows over structured products. He talks about how carefully chosen US equities can manage this.

Michael J Mangan, portfolio manager at Natixis Global Associates, believes the valuation of some US equities is so compelling now is time to consider increasing clients' allocation to the world's largest equity markets. He will talk about where the group sees value and how he selects shares that can outperform.

Aaron Barnfather, manager of the Lazard European Alpha fund, will provide a picture of the situation in Continental Europe. He is seeing optimism in some areas, but the corporate environment remains poor and he continues to be very stock-specific. Matthew Leeman, managing director at Morgan Stanley, is also taking a stockpicking approach to the region and will be talking about where he is invested.

Emerging markets, and in particular China, have been a significant prop to the global economy. Bryan Collings, managing partner at Hexam Capital Partners, argues that the recent rally is well supported by improved economic data, but there has been some over-exuberance. He says: "We have embraced the recent irrational volatility in emerging markets and this boosted fund performance. But normality now appears to be returning as investors begin to re-appreciate the fundamental appeal of the asset class. We have, therefore, taken some risk off the table despite remaining bullish in the longer term."

In the fixed-income market, opinion is diverse. David Leduc, manager of the BNY Mellon Global Strategic Bond fund, says there are strong arguments against investing in the UK corporate bond market but investors need income and have been hard hit by the plunge in interest rates and the reduction in some dividends.

He argues that investing globally is the answer. "Companies look to various markets around the world when thinking about issuing corporate bonds. Recently, many have chosen to issue dollar-based bonds because of the low interest rates in the US and greater liquidity. On the other hand, some US firms - such as GE - issue bonds in other currencies such as the euro," he says. "There will often be pricing and yield differentials so the global bond fund manager can select the best value offering. For example, National Grid euro corporate bonds have recently been better value than the company's sterling offering."

Jim Leaviss, head of retail fixed income at M&G, says there is still good value in investment-grade UK corporate bonds: "Concern has grown over the possible impact on future inflation of quantitative easing (QE), large budget deficits and near-zero interest rates. The increase in yields on long-term government bonds has suggested market participants are concerned about future inflation levels.

"However, all the signs are that we are still very much in a low inflation environment characterised by sluggish growth. At this stage, we have not seen any indication that QE is having an inflationary impact. The rate of inflation is rapidly falling in many countries and wage increases have stalled in the face of high unemployment. Deflation, not inflation, seems to be the problem facing the global economy. We remain convinced corporate bond spreads are sufficiently compensating investors."

Theo Zemek, global head of fixed income at Axa Investment Managers, also believes corporate bonds look cheap at today's market levels, but is increasing her exposure to defensive sectors and reducing exposure to subordinated financial debt. As part of this cautious approach, she will continue to add stable government-guaranteed and supranational-issued bonds to the portfolio.