AXA's Peirson: Forget the euro crisis - equities will rise in 2012

Equities are likely to post gains in 2012 whatever the outcome of the sovereign debt crisis in Europe, according to Richard Peirson, manager of the £347m AXA Framlington Managed Balanced fund.

“I think we will see equities end the year higher almost regardless of what happens in Europe with the debt crisis. I think we see good value in equities, and the converse of that is I am pretty cautious about bonds,” Peirson said.

The “extraordinarily good” company results seen in 2011 were obscured by investors' fears of a eurozone recession this year as well as the possibility of a concerted slowdown in China, he added.

But the manager said he is now much more confident of another year of 8% growth in China, pointing to cooling inflation pressures and a slowly deflating property bubble, while the improving US economy should also prove supportive this year.

“Therefore, although Europe is going to be pretty hard work this year, by the end of last year I think equities had discounted an awful lot and I am actually quite sanguine about the outlook for equities,” Peirson said.

“In terms of asset classes, when you have got equities yielding significantly more than bonds, I know where I want my money to be.”

Peirson said he is certain bond yields would eventually normalise, with 10-year gilt, treasury and bund yields all moving from 2% to 4%, and said such a move could take place this year.

He said it would be difficult to significantly underweight bonds within his portfolio because of investors' expectations of how balanced funds should operate, but noted his current position of 21% in cash and bonds featured just over 10% in cash – a level almost twice what he would typically hold.

Within the bond portfolio, 7.5% is in “short-ish dated” UK gilts, with some 40% in relatively short-dated index linkers, which Peirson sees as an insurance policy.

The fund retains a slight overweight to US equities, but the manager has not increased that position materially over the past year. In UK equities, he has made a modest move into housebuilders, which he said are still interesting on a two- to three-year basis despite having performed well of late.

Over the long-term, however, Peirson expects to reduce his UK equity exposure from the current level of 42% of the portfolio. “The peer group allocation is [effectively] our benchmark, it is our starting point, and we have seen over the last 20 years that managers like ourselves, and pension fund managers in particular have reduced their UK equity weight, which means our benchmark position has reduced.

“There may be times when we want to be very overweight in the UK, but I suspect it will decline over time as it has over the last 20 years.”

The AXA Framlington Managed Balanced fund has returned 48.9% over the three years to 20 January, according to Morningstar, versus an IMA Mixed Investment 40-85% Shares sector average of 36.3%.