Europe continues to be the favoured market in managed portfolios on the back of its potential for re...
Europe continues to be the favoured market in managed portfolios on the back of its potential for restructuring.
Morley Fund Management and Scottish Life both have overweight positions in European equities amid a favourable economic environment.
The benign climate is shown by the 0.4% rise in retail sales in eurozone countries seen in February compared with January, representing a 2.7% rise compared with a year earlier.
Andrew Milligan, director of economic research at Morley Fund Management, says: "There is some solid economic data coming through on unemployment and consumer spending and there is still a lot of interest in the technology, media and telecoms stocks in Europe. The European Central Bank is raising interest rates and bond yields are being pulled higher but it does look like we are in a favourable part of the economic cycle and the earnings figures coming through are very solid."
David Binnie, senior investment manager at Scottish Life, adds: "There are two sides to this, the restructuring story and earnings upgrades. We are starting to see earnings forecasts rising and yet interest rates are going up, although clearly from a low level. Europe is also moving towards being more market friendly with more focus on shareholder value and M&A activity increasing.
"We are underweight the UK. The UK is fine and the outlook is good but if things go wrong in the US that will probably follow into the UK. There is also nothing exciting to go for in the UK compared to Europe. Restructuring has happened here as has falling inflation."
The FTSE All Share index rose 5% in the year to 16 May.
Binnie says he believes the US is overheating and this may hold back the stock market in the short term. The group is also neutral on the Far East. While it has good growth potential, Binnie says markets such as Hong Kong are tied in to the US and are vulnerable to a correction. The S&P 500 has seen a rise of 9.38% in the 12 months to 16 May in dollar terms while the Hang Seng has risen by 20.43% in local currency terms over the same time period
Milligan says: "The most uncertain market is the US and the risks are undoubtedly increasing here. A soft landing would be signalled by the Federal Reserve managing to get GDP growth down towards more acceptable levels. If we saw a continuation of the upturn in inflation and economic growth continuing strongly we would move sharply underweight US equities.
"We are currently modestly overweight but we are watchful. The type of stock that one is picking in the US is more important than the market trends. We are overweight in some of the tech, media and telecom stocks but if we feared a hard landing we would move towards more defensive stocks."
US unemployment hit a 30-year low of 3.9% in April.
Milligan adds: "We believe the Japanese market will trade in a range. Consumer spending is not doing as well as industrial spending. There is also uncertainty in the run-up to the election. We are relatively optimistic on the long term for Japan but cautious on the short term."