Japan
Unfortunately the recent volatility has tarnished the story and it is likely to be a very bumpy [ride]. Even if the returns come now, they won’t look that good on a risk-adjusted basis. Only substantial earnings growth could deliver the gratification that Japanese equity markets need, but that doesn’t leave much room for upside surprises.
Europe/eurozone
Europe has among the most interesting equity markets with the end of austerity in the offing and innovative stimulus policies being discussed. No doubt few investors will have high hopes of seeing significant policy actions. But we like cheap assets and many positive developments lurk beneath the surface here, whereas the negatives are widely appreciated. Can governments revert to growth-orientated policies but keep reforms on track?
S&P 500/US
Not going anywhere until investors get over quantitative easing (QE), which implies increasing volatility and not much return. It is a shame because QE has done its job and the economy is back to being a relatively dynamic leader among developed markets. It is likely to be the first economy to see the return of growth-related capital investment by companies but, while being good for macroeconomic growth and theoretically good for equity valuations, it is likely to dampen margins in the short term.
Property
Global Reits [real estate investment trusts] have dipped on fears of a rise in interest rates. Compared with an average yield of 3.5 per cent on global Reits, the 1.4 per cent yield that was being offered on the 10-year UK gilt in the middle of last year did not look that exciting. Since then the UK gilt yield and yields on US Treasuries have been rising and the yield on the 10-year UK gilt is now roughly 2 per cent and the position has changed.
Bond yields
Bond yields have started to normalise with a vengeance but it was highly unlikely that it was ever going to be a controlled process. The central banks cannot – and will not want to – eliminate bond market volatility entirely. Bond volatility can unsettle other asset markets. We saw this in Japan, where wobbles in Japanese government bonds preceded wobbles in equities. This is likely to be only a temporary blip before bond investments head into those other asset classes.
