Property: Developing market retail may be better able to accommodate the global move towards online retailing. This contrasts with retail in developed markets, which have already been built out around high street models and are less favourably positioned to adapt to this disruptive online trend. It remains to be seen how UK commercial property fares following Brexit – it may come under pressure if firms move operations offshore. Asian markets offer population dynamics that are more favourable, and where a growing consumer base will help adjust to an online world.
John Stopford, head of multi asset income at Investec Asset Management
UK equities: We remain more cautious on the prospects for UK equities where returns continue to be driven by conflicting factors. The market remains underpinned by easy monetary policy and sterling weakness, both of which are less supportive given a more hawkish central bank and a stronger pound. Uncertainty around Brexit negotiations under a newly formed hung parliament remains, and evidence has emerged of more significant concerns for an economy still reliant on consumer credit and housing.
European equities: Fundamentals are continuing to improve, with strong sales growth and a generally more supportive macroeconomic backdrop. Valuations are less demanding than for the US, although the second-quarter results season was more mixed. Longer term, any normalisation from the European Central Bank through tapering is a potential headwind and, while political risks do remain, they are somewhat more contained.
US equities: Although valuations are stretched compared with history, the fundamental backdrop remains supportive and helps to justify these levels, but momentum has turned negative. Second-quarter results saw the balance of firms within the S&P 500 beat both earnings and sales estimates across most sectors. We expect a steady path on rate hikes by the Fed, though the effect of balance sheet reduction is unknown. Against this backdrop we support high-returning firms with earnings visibility that we consider to offer better long-term prospects than broader equities.
Emerging market equities: Valuations have normalised and are no longer as compelling. Earnings have bottomed out but have yet to rebound, with volumes still weak. Momentum remains positive and is not overextended, although it has moderated. In China, we have pared back our conviction somewhat, but we continue to look for companies that stand to benefit from the country’s reforms, economic rebalancing and supportive valuation.
Fixed income: Government bond yields reflect slow trend growth, loose monetary policy and low inflation expectations. We see some cyclical risks from less accommodative central banks, and prefer markets where policy is well behind the US, or priced to tighten too much. Emerging market bonds offer reasonable relative value and many of the higher yielders continue to benefit from inflation and interest rate convergence with major markets. Corporate bonds are expensive, with spreads back at multi-year lows. The fundamental backdrop is favourable, while inflows into the asset class remain strong.
