Quan Nguyen

In the past month Zenith has been the first Australian research house to rate three new funds from Airlie Funds Management and Firetrail Investments, and as Zenith’s Head of Equities Quan Nguyen explains, backing selective funds early is all part of a value proposition that can benefit adviser clients and their investors.

That’s because like companies, investment funds often have their own life cycle and the potential for strong performance can change as a fund grows and new investors get on board. In the equities space this is particularly true: as the best opportunities are ultimately finite, and getting into a fund early when trading is most agile, can often mean a big difference in returns for investors. In theory at least, the larger a fund grows, the harder it is to sustain the performance of its early days. Wait several years and you have a real prospect of missing the investment boat.

In February this year, Zenith published a research report that determined the best time to invest in a smaller companies fund is at the beginning of its life. Zenith believes this is due to lower levels of FUM during the early stages of a fund’s life. This allows the fund manager to be more nimble when trading stocks, in addition to having a broader investment opportunity set relative to peers who manage more assets. Zenith found that the average Small Cap fund outperformed its benchmark by approximately 12% in the first 12 months of its life. However, as the funds matured, the average excess return gradually declined to a more subdued, albeit still attractive, 7.9% p.a. by year 10, before gradually converging towards approximately 7% p.a. thereafter. As such, we believe value still remains in investing in funds that are more mature with established track records.

Zenith’s philosophy is to empower its advisers to deliver best of breed financial advice by accessing the world’s best investment opportunities as soon as practicable. That requires having a broad, lateral and empathetic mindset on what advisers and their clients require as investment solutions, often before they may be aware of its availability. It requires flexibility from a research team in what is an extraordinarily busy annual review cycle covering over 780 funds. It also requires a bold commitment to review funds through an established and thorough process – no shortcuts. Even if the opportunity for investors appears very compelling, a research rating requires a deep dive and factual assessment of whether a fund can deliver on its objectives for investors.

Quan said “In rating funds early, we need to balance out the priorities and probabilities of approving investment solutions that will add the most value to our advice clients, while allowing an appropriate track record to develop to ensure all ratings are based on solid fundamental principles and high conviction”.

Mark Burgess, Head of Research Relationships at Magellan said “Zenith has shown a willingness to identify and rate quality strategies early. They were first to rate the Magellan Global Fund in September 2007 and they have backed this up again by being first to rate Airlie in June 2018.”

Airlie Funds Managment rated first by Zenith

On 1 June 2018, Zenith initiated coverage on the Airlie Australian Share Fund with a Recommended rating.

The Fund is managed by Airlie Funds Management (Airlie) and distributed by Magellan Asset Management (Magellan). The Fund provides investors with a fundamentally driven, quality and value styled, Australian equities exposure.

Zenith has known both portfolio managers John Sevior and Matt Williams during their tenures at Perpetual where the strategies they managed generated attractive absolute and excess returns.

Zenith has a high regard for Airlie’s senior investment personnel and believes the investment process employed has the Fund well positioned to achieve its investment objectives.

Firetrail Investments rated first by Zenith

On 8 May 2018, Zenith initiated coverage on the Firetrail Australian High Conviction Fund and the Firetrail Absolute Return Fund. The Firetrail Australian High Conviction Fund has been rated Highly Recommended whilst the Firetrail Absolute Return Fund has been rated Recommended.

Zenith’s conviction in the Firetrail Australian High Conviction Fund is underpinned by the consistent application of the investment process which produced impressive long-term excess returns during the investment team’s tenure at Macquarie Asset Management (MAM). Despite the recent formation of the business, Zenith has a high regard for Firetrail’s investment personnel and capabilities and believes the Fund is well placed to meet its investment objectives.

More funds on the pipeline

Zenith is committed to uncovering new, quality investment strategies and presenting new options to its advice practice clients. With each sector asset class review, consideration is given to new funds that may be included in the ratings universe. In the most recent Australian Fixed Income Sector Review released on 31 May 2018, Zenith introduced five new fixed income strategies to the ratings universe.

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Mark Burgess

Equities continued to make new highs as we moved into 2017, but we are mindful that the outlook is littered with macroeconomic and political risks – not least the forthcoming elections in France, Holland and Germany, Article 50, and President Donald Trump.

Unlike late last year, when specific sectors such as financials and energy drove the bulk of global returns, the latest rally in stocks has been broader based. A weaker sterling has driven UK equity performance, though a recent speech by Prime Minister Theresa May on Brexit negotiations saw sterling leap higher, knocking back the FTSE 100 somewhat.

President Trump

Equity markets have of late focused on the growth aspect of ‘Trumponomics’ with the belief that Trump is good for US and global growth, as well as corporate profits, all of which is supportive for equities. In the US, earnings have been improving, largely on the back of a rising oil price and the US dollar, not to mention a robust consumer growing in confidence causing the market to rally. If President Trump can deliver his tax and fiscal promises in full as well as finding a constructive approach to international trade, then there is little reason why the current rally should not continue.

Underemployment suggests there is still space in the labour market and there is only moderate wage pressure coming through. Until inflation starts to pick up there will be no need for rate rises and the market can continue its recent trajectory. Add to this Trump’s mooted tax cuts in all their guises and this will only improve the environment for businesses and consumers. If the recent spike in small business confidence numbers are anything to go by Trump has improved corporate confidence and, as we know, markets continue to do well as long as their confidence doesn’t wane.

That said, alongside Trump’s tax cuts are his potential tweaks to trade tariffs, while few have been able to unravel in full the complexities of any amendments he makes to the US Border Adjustment Tax that could see both manufacturers that assemble parts from overseas as well as those importing manufactured goods into the US charged higher tax rates.

It seems clear that these factors will be bad news for emerging market manufacturing and any increase in protectionism associated with Trump could be very damaging for companies with global supply chains, as indeed could an increase in labour bargaining power. Yet the risks we see may well be tempered by supportive fiscal policy in the US and monetary policy in Europe and Japan. Global quantitative easing outside America will help keep a lid on rates, which makes for a reasonably benign, low-rate environment alongside decent growth.

While corporate credit and equities appear to be pricing in better economic growth, core fixed income is moving oppositely. There are several plausible explanations for this divergence, not least of which is that inflation expectations have increased in core fixed income markets, suggesting they might also be pricing in the better growth suggested by equities. An end to the global profits recession – with global earnings revisions at multi-year highs, is also a likely explanation for better equity performance.

Portfolio positioning

In terms of portfolio positioning, we have been looking whether we are in a bubble in high yield corporate credit. Clearly it’s not cheap, with yields at record lows and spreads tightening to late-cycle levels; but interest cover is reasonable, while defaults have (at least temporarily) fallen on the back of recovering energy prices. For now, we are happy not to move more neutral but we are keeping an eye on the risks to that view, not least if US growth begins to accelerate by more than we have anticipated.

Last year was a difficult one, leaving many investors feeling bruised. Cash balances are still high among equity investors, but we remain cautious (and sometimes reluctant) owners of risk assets, a strategy that has served us well, particularly in our asset allocation portfolios. We expect volatility to be present throughout 2017 but, as active managers, we will continue to look for opportunities to add to our high-conviction positions.

By Mark Burgess, CIO EMEA and Global Head of Equities

The post January investment strategy update appeared first on AdviserVoice.

Mark Burgess

We continue to live in a world of extraordinary monetary policy, where investors are no longer surprised by central bank easing and, indeed, have come to expect it.

Thus the equity market rally continued into August, buoyed in the UK by the widely expected announcement of a Bank of England base rate cut to 0.25% – the lowest it has been in the Bank’s 322-year history – along with the expansion of quantitative easing. That made for a package of complementary measures that is impactful for the UK economy.

Bond yields have fallen very sharply, supported by easy monetary policy across Europe and Japan, which in turn is underpinning yielding assets, whether that be equities or credit; with the BoE’s quantitative easing propelling yet another strong rally across core government bonds.

Recent data showing a resumption of strong jobs creation has underpinned the outlook for the US economy, and there is growth coming through in the US, albeit at lower levels than we might have seen historically. We know the Fed is looking to normalise monetary policy and raise interest rates, but its ability to do that is somewhat hampered by the aforementioned monetary policy conditions elsewhere, which may hold the Fed back in the short term. We continue to expect one rate rise this year and two in 2017.

Globally, divergent monetary policy is going to be a major influence on asset classes, with investors having ever fewer places to go in their quest for yielding assets. In my view, this will continue to be the dominant theme in the global economy for the coming months and maybe years.

Having been neutral since February, we think the US dollar is likely to trend gently higher, driven by capital flows rather than growth or monetary policy divergence, and we have lifted our weighting to a modest favour from neutral previously. But we are mindful of what this might mean for risk assets which, from a valuation perspective, are mostly at near-time or all-time highs already.

Commodities

Gold aside, commodities stand out as one asset class that has yet to see an uplift. We see commodities as a useful portfolio diversifier and are mindful of its ‘catch-up’ potential, so we have lifted our allocation to the asset class. At a broad level commodities rallied from 2000 to 2008, driven by the rapid industrialisation and urbanisation of China, but as the pace of this levelled out commodities entered a bear phase and now almost every commodity is trading below its 15-year median trading level, aside from gold, coffee and cotton. Energy in particular is trading well below its median level.

There are compelling reasons for a more favourable outlook. The key drivers of a commodity bull market are a drop in production coupled with increased demand. Since 2012 there has been a dramatic change in capital expenditure among mining companies, with capex falling by nearly 90% in four years. Against such a drop in demand, supply had to fall – but this has taken time.

Excess supply of oil is now falling, in part due to the price war that drove many uneconomic shale fields out of production, and US domestic production is expected to fall significantly this year. That leaves fewer oil producers left to turn on the taps. To put today’s oil market dynamic in context, during the oil bear market of the 1980s there were up to 15 million barrels per day of spare capacity and we were only consuming 60mbpd globally. Now, on a global basis we are consuming around 95mbpd and there is only around 1mbpd of spare capacity. Therefore, in our view a reversion to a $30 oil price would require an unforeseen collapse in demand – at a time when demand for oil continues to be revised higher as consumers react to the lower price environment. Emerging markets are key drivers of this demand.

In our view, we are now at the point where the supply/demand dynamic is rebalancing across commodity sectors, including the base metals markets.

Gold demand is soaring, and coming predominantly from investors via ETFs. Total demand in the first half of the year hit a new high, eclipsing the previous record set in 2009. Clearly, seven years ago we were in the midst of the Global Financial Crisis and there are parallels today: like then, investors clearly see gold as something of a safe haven amid dwindling bond yields and volatility across risk assets.

Investment demand drives gold rallies and the ‘lower for longer’ dynamic that we see playing out for the foreseeable future will continue to concern investors. Our world of extraordinary monetary policy and negative interest rates is new territory for many investors and so we do not envisage demand falling; instead we see it benefiting as part of a broadly-based commodity rally.

By Mark Burgess, Chief Investment Officer EMEA and Global Head of Equities

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Kardinia was formed in 2011 by Mark Burgess and Kristiaan Rehder in partnership with Bennelong Funds Management to manage the Fund’s strategy. The Bennelong Kardinia Absolute Return Fund aims to achieve absolute returns in excess of 10% per annum over the long-term.

Zenith considers the investment team “to be of a high calibre and was recently bolstered by the addition of Senior Analyst, Stuart Larke, in January 2016”.

Zenith reports “Kardinia maintains an equal focus on meeting its performance objectives and capital preservation”. Zenith has confidence in the ability of the Fund to deliver on its performance objectives given “the attractiveness of the underlying investment philosophy and process”.

Zenith’s report also highlights the Fund is among the more dynamic variable beta strategies available to investors, able to preserve capital in falling markets by materially lowering its net equity exposure.

Kardinia’s Fund is available on an extensive list of platforms and has recently been added to CFS FirstWrap.

The post Kardinia Fund awarded ‘Highly Recommended’ rating from Zenith appeared first on AdviserVoice.

Mark Burgess

Global markets are being troubled by a range of issues; some old, some new.

To my mind, three issues are worth paying close attention to:

• Global growth
• Ongoing macroeconomic uncertainties in China
• Debt

Growth and expectations have been reined in during April as the short-lived Chinese stimulus – which briefly led to improved economic data – came to an end and Europe slowed, not least because of Brexit fears in the run-up to the EU referendum on 23 June. Leading indicators across the globe are all showing soft GDP growth and the global growth slowdown is leading to expectations of rates being lower for longer, which in turn is providing support for risk assets.

In Europe, the mediocre economic and company data we are seeing would usually be alarming, but with low levels of productivity this level of economic activity still represents above-trend growth. So we’ve seen equity markets rally off their lows at the first part of the year, not because the news flow is improving but rather on the expectation that interest rates will stay low as a result of the low growth environment. Core bond yields have rallied and that discount rate has provided support to long-duration assets and risk assets more broadly.

But this fragile rally has not made for a robust investing environment. Nevertheless, it is the environment that we have. Clearly, in a low-growth world we are always closer to the fear of recession, which we saw earlier this year. Corporates are navigating through the terrain relatively well, although this is against significantly revised earnings expectations.

Our equity strategy has been to favour the UK, Europe and Asia ex Japan and, while we are well-positioned for a low growth, low return environment, we have recently decided to take some risk off the table by paring back our overweight position with regard Asia ex Japan.

China is an ongoing theme. Clearly, markets became concerned by the absolute levels of Chinese debt and China’s ability to both sustain its growth and engineer a soft landing without prompting a credit crisis. It has taken on more debt to keep growth growing and markets have perversely accepted this – perhaps this is another case of extraordinary fiscal and monetary policy becoming ‘the new normal’. It is difficult to call when China’s credit issue will become more immediate, though recent rhetoric indicates there is an increasing clamour for the People’s Bank of China to address the ‘credit binge’. Not least with the publication of an article in People’s Daily citing an ‘authoritative source’ that was critical of the debt-driven growth strategy employed by the Chinese authorities.

Any departure from a strategy of growth through credit issuance would have significant implications for markets. It would focus the spotlight on the number of bad loans in the Chinese banking system and lead to rising corporate defaults. This could bring to an abrupt end the change of fortunes that has lifted commodity prices. Though I don’t believe we are yet at the point where the People’s Bank of China will turn off the credit taps, we are keeping a close eye on it and I am not hugely confident about China’s ability to get through this without doing too much damage to itself or the global economy.

It is not only China that has a debt issue – net debt to GDP is near or at all-time highs in most countries. This has not been an issue for corporates due to massive monetary stimulus and low interest rates, but the underlying macro backdrop is not one that suggests rampant market returns. There are huge amounts of fiscal debt in the system and generally three ways to tackle it. Growth is one way, though as we’ve seen this is proving difficult across the globe, while you can inflate your way out of debt or you can default. Monetary policy has so far failed to result in inflation working its way into the system, while defaults will do little to buoy markets. Countries may well try to use all three mechanisms available to them, so we might expect defaults to rise.

We have recently discussed whether any country might seek to write off its debt and what impact that would have. While this is largely a thought exercise, it is interesting to imagine what the market reaction would be to, say, Japan writing off its debt, which it largely owns itself. With no-one to pay back, a write off might not have a hugely negative impact, but it could lead to currency implications and a knock-on effect on the markets.

In the US, inflation data is ticking upward, with wages rising in most areas, yet markets had been relatively sanguine until the publication of Fed minutes indicating a June interest rate rise could be on the cards gave markets the jitters. Even so, the prevailing market sentiment is that the magnitude won’t be high enough to prompt a strong market or central bank reaction, which could be right given the number of deflationary shocks we have experienced.

The US economy needs to create around 80,000 jobs a month to maintain the employment rate. Job growth has been running faster than that level for over five years, and it appears that job openings are becoming harder to fill. While wage growth has increased from the 1.5-2.0% range in which it sat for many years, its recent rise to a 2.5% growth rate still appears tentative. Against that backdrop, the dollar may have started a much anticipated bull run, with the well-known consequences for emerging markets and other asset classes.

By Mark Burgess, Chief Investment Officer EMEA and Global Head of Equities

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Important Information: This material in this publication is for information only and does not constitute an offer or solicitation of an order to buy or sell any securities or other financial instruments to anyone in any jurisdiction in which such offer is not authorised, or to provide investment advice or services. Past performance is not a guide to future performance. The value of investments and any income is not guaranteed and can go down as well as up and may be affected by exchange rate fluctuations. This means that an investor may not get back the amount invested. The research and analysis included in this publication have been produced by Columbia Threadneedle Investments for its own investment management activities, may have been acted upon prior to publication and is made available here incidentally. Any opinions expressed are made as at the date of publication but are subject to change without notice and should not be seen as investment advice. Information obtained from external sources is believed to be reliable but its accuracy or completeness cannot be guaranteed. The mention of any specific shares or bonds should not be taken as a recommendation to deal. This document includes forward looking statements, including projections of future economic and financial conditions. None of Columbia Threadneedle Investments, its directors, officers or employees make any representation, warranty, guarantee, or other assurance that any of these forward looking statements will prove to be accurate. This document may not be reproduced in any form or passed on to any third party without the express written permission of Columbia Threadneedle Investments. This document is not investment, legal, tax, or accounting advice. Investors should consult with their own professional advisors for advice on any investment, legal, tax, or accounting issues relating an investment with Columbia Threadneedle Investments.

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Mark Burgess

Global equities and global bonds made progress in May 2014, with the former outpacing the latter in local currency terms; for the month, the MSCI World index rose 2.34% in total return terms while the JP Morgan Global Government Bond index returned 0.87%.

Commodities, which prior to May had performed very robustly, lost some ground as the Dow Jones-UBS Commodity index produced a dollar total return of -2.87%. Nonetheless, returns from the asset class remain well into positive territory for 2014 to date.

Looking forward, we believe that there are three questions that investors have to consider over the remainder of 2014:

•    How will bonds react to the normalisation of policy in the US?
•    What will happen in emerging markets as policy is normalised?
•    Will corporate profits drive equity markets higher?

Bond markets in recent months have presented us with a conundrum – indeed we held an ad-hoc Perspectives meeting in mid-May to discuss the meaningful decline in core government yields. In the US, our expectation is that GDP growth will be in the order of 2.5% this year and that the overall macroeconomic picture is probably stronger than the Q1 GDP data would suggest. All else equal, that should push bond yields higher, particularly if the Fed stops its QE programme later this year.

The outlook for eurozone bond markets is rather more difficult to call; certainly Germany and Spain appear to have positive growth momentum, which should put some upward pressure on yields if that momentum remains in train. By contrast, the growth outlook in countries such as Italy and France remains very subdued, which is likely to keep yields low. The lack of growth in France and Italy is worrying given that debt levels remain elevated at a time when inflation in the eurozone overall is very low (just 0.5% for the year ending May 2014). The ECB has responded by cutting official interest rates to record lows and now charges banks for depositing funds. It has also outlined a new programme of Long Term Refinancing Operations (LTROs) to aid bank lending and has said that it will intensify preparatory work related to outright purchases of asset-backed securities. Whether this policy response will work remains to be seen, but it shows that the ECB is definitely not resigned to a protracted period of low inflation.

In emerging markets, we remain positive on local currency emerging market debt (EMD) in our asset allocation matrix; my colleagues James Waters and Toby Nangle have commented recently on the value offered by EMD, especially for investors seeking absolute levels of yield. However, we maintain a bias against emerging market equities as we are still concerned about the macroeconomic outlook for China (which is a large constituent of the EM equity indices but only a relatively small component of EMD indices). As I have mentioned in previous comments, it is very hard to find examples of credit expansion on the scale seen in China which have not caused policymakers some significant headaches once the bonanza has ended.

Our outlook for equity markets for the remainder of the year is positive; M&A has made a welcome return in recent months, and while this increases the risk of value destruction by company managements in the longer term (e.g. if they overpay or acquire businesses that later prove to be a poor fit), it does provide an important short-term support for stocks, particularly at a time when the Fed is tapering QE. The style rotation over the last few months has been significant, but overall equity markets have been strong and current index levels suggest that investors still have confidence in the outlook for profits. For that reason, we trimmed exposure not only to government debt but also to investment grade credit in late May, as the rally in core yields had left both asset classes looking expensive. We deployed the proceeds into Japanese equities, as the fundamentals here continue to improve while the market has lagged other developed regions over 2014 to date.

by Mark Burgess, Chief Investment Officer at Threadneedle Investments

The post Threadneedle’s latest investment strategy and market commentary appeared first on AdviserVoice.

Mark Burgess

Global equity markets were largely unchanged in April, although this masked a fairly wide dispersion in returns at the sector level.

Earlier in the month, for example, technology stocks came under pressure and triggered a general slide in equities due to fears that valuations were overstretched. Tensions between Russia and the West also undermined investor sentiment. However, equity markets subsequently rallied strongly on the back of encouraging US data and some easing of geopolitical tensions before some disappointing earnings releases in the US, a deterioration in the Ukraine crisis, and fresh concerns over the economic outlook in China weighed on risk assets in the final days of the month.

Treasury yields fell with the 10-year benchmark yield ending April at 2.66%, compared with the 2.72% level seen at the end of March. At the end of the month, and as expected, the Federal Reserve continued to reduce its monthly bond buying by US$10bn to US$45bn. The central bank said that growth in economic activity had picked up recently, having slowed sharply during the winter. The Federal Reserve also repeated its ambition of keeping interest rates at very low levels, saying it would maintain interest rates “below levels the committee views as normal in the longer run” even after the US economy has improved enough to hit target levels of unemployment and inflation.

In the eurozone, Portugal returned to the bond market for the first time in three years, holding a successful auction of €750m. The auction was three times oversubscribed and 10-year government debt yields fell sharply to an eight-year low of 3.58%. Greece also returned to the bond market for the first time since 2010. It sold €3bn of five-year bonds at a yield of 4.95% and said the issue was eight times oversubscribed. At the end of the month, the yield on the Portuguese 10-year bond had fallen to 3.64%, while that of the Greek equivalent was down to 6.64%. Eurozone bonds in general gained over the month on speculation that concerns over deflation could cause the ECB to adopt new stimulus measures.

The J.P.Morgan EMBI+ Index (on a total-return basis) delivered a positive return as emerging market bonds continued to recover. Russia proved an exception, however, with tensions between the West and Moscow over the Ukrainian crisis hurting investor confidence in the country’s bonds. Moreover, the credit rating agency Standard & Poor’s cut Russia to BBB- with a negative outlook, placing it on the brink of junk status. Meanwhile, the MSCI Emerging Markets Equity Index (total return, local currency) was largely unchanged over the month.

We made no changes to our investment strategy over the month. We remain overweight equities as valuations are largely reasonable, although less compelling than was once the case. We also remain underweight Asian equities on concerns over China, while we are overweight Japan as valuations are attractive versus developed world peers. Although we remain overweight equities, it would be fair to say we are less optimistic than we have been. Having said that, the recent pick-up in M&A activity in areas such as pharmaceuticals should prove supportive.

Within fixed income, core yields are going to grind higher, and there is much less value in credit given how far spreads have tightened. Only emerging market debt appears to offer any real value, but given the risks in terms of China, geopolitics and the macroeconomy, we are wary of increasing our weighting at present. The good news is that the current environment is likely to continue to provide opportunities for stock pickers, which we aim to exploit.

by Mark Burgess, CIO at Threadneedle Investments

The post Threadneedle’s latest investment strategy and market commentary appeared first on AdviserVoice.

Mark Burgess

In this latest outlook, Mark Burgess, Chief Investment Officer at Threadneedle Investments, assesses market activity so far this year and provides an asset allocation update.

• Threadneedle halves overweight in equities
• Increases underweight in Asian equities on China concerns
• Increases overweight in Japan

In our last asset allocation update, we framed the outlook for 2014 in the context of how bond markets deal with policy normalisation; what happens to emerging markets as a result; and whether corporate profits will meet expectations?

The first quarter has been a testing time for markets as they have grappled with the above, overlaid with an escalation in geopolitical risk, and ongoing concerns regarding the burgeoning Chinese credit bubble. Markets took serious fright in January and February, but risk appetite has returned and investor sentiment improved. In equities, with the exception of Japan, developed markets are now flat on the year, having been considerably weaker, whilst in emerging markets the picture is more mixed, albeit with a very significant rally in the last week. In fixed income, core yields are now rising again although at much lower levels than the beginning of the year, and are comfortably off the lows. Credit grinds ever tighter (can we still call it high yield at a 4 % yield?), and emerging market debt like its equity counterpart, has rallied strongly in the recent period.

When we consider the macro economic backdrop, the developed world is still on an improving trend, albeit at a slightly slower pace than we had expected at the beginning of the year. The Fed remains committed to an orderly ending of QE and expectations are now for short rates to start rising in H1 2015. It is difficult to know the impact of policy normalisation on the economy but it will be a headwind and debt remains stubbornly high. In Europe, deflation is rearing its ugly head and with a similar debt concern the ECB must surely be considering more imaginative policy options than hitherto. We would consider any new measures to be acting from a position of weakness. Arguably, given weak economic activity, a profoundly fragile periphery, and stubbornly low inflation, any new measures should have already been introduced. In Japan, Abenomics appears to have stalled, and the currency has stopped depreciating. Nervous of the impact of the consumption tax, the Nikkei has fallen sharply relative to other developed markets, in contrast to last year.

Perhaps the biggest conundrum is China. Over the last few years there has been an explosion of credit, facilitated by the shadow banking system. Retail investors have been enticed into an array of savings products promising heady returns where the underlying investments are often opaque. It is clear that the authorities are now concerned about this and investors are surely going to see an increasing number of these funds go bust. Looking back through history at economies that experienced a similar growth in credit, it is difficult to find one that ended well. At best we are likely to see a material reduction in China’s growth rate, however it could be much worse. Clearly the prolonged underperformance in Chinese equities has discounted some of this, and valuations are low relative to other markets. However the unwinding of the Chinese credit bubble could severely test the Chinese financial system, and unnerve investors further.

Consequently we have decided to halve our overweight in equities and move to a neutral position in cash. Equity valuations remain attractive, but they are less compelling than they were. We increased our underweight to Asian equities on the China concerns and increase our overweight to Japan on the belief that the impact of the consumption tax will be lower than feared. Although we remain overweight equities, it would be fair to say we are less optimistic than we have been for some time. Within fixed income, core yields are going to grind higher, and there is much less value in credit given how far spreads have tightened. Only emerging markets look like they offer any real value. But given the China issue and geopolitical and macro risks, we are wary of increasing our weighting at present. If there is good news, it is that the environment is likely to throw up opportunities for stock pickers which we aim to continue to exploit.

The post Threadneedle Investments asset allocation update: April 2014 appeared first on AdviserVoice.

Mark Burgess

Commenting on the effect on global markets from the Ukraine crisis,Threadneedle Investments’ Chief Investment Officer Mark Burgess, said: “To date, the fallout from the Ukrainian crisis has been largely confined to the emerging market debt, emerging market equity and commodity markets.

At current levels, emerging market local currency debt appears to offer value, although we expect both the hard and local currency markets to remain volatile in the short term.

Emerging equities reflect concerns not only around Russia and Ukraine but also the weaker growth outlook in Brazil and China. In commodities, Russia is a significant oil player, supplying 30% of Europe’s gas, with 50% of that piped through Ukraine. Any move to curb Russian oil exports by the EU could easily drive Brent crude oil into the $140-160 a barrel range. We therefore do not expect major sanctions against the country.

“Elsewhere, investment grade and high yield markets have been unmoved by the crisis in Ukraine. Foreign exchange markets, outside of the obvious areas such as the rouble, have also ignored it. Developed market equity and bond markets have recently been driven by other factors such as the headwinds from a stronger pound for UK equities, the severe weather in the US and the weaker than expected European corporate results.

Finally, core government bond investors have been focused on the softer US macroeconomic data, which has seen 10-year Treasury yields fall. We are monitoring the situation closely, but as it looks today, markets are not expecting further intervention or action by Russia.”

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Mark Burgess

Threadneedle Investments has raised its 2014 GDP forecast for developed economies as a result of the strengthening global economic recovery.

The company’s US forecast has increased from 2.5% to 2.7% and its UK forecast from 2.25% to 2.5%. The euro area has seen the biggest jump from 0.7% to 1.1%.

Mark Burgess, CIO at Threadneedle Investments, said: “The global economic recovery is gathering pace. It is driven by the developed world and as a result we have raised our economic growth forecasts for the three major economies. The US is increasingly becoming an attractive base for manufacturing, while housing and consumption remain strong. The UK housing market has also strengthened, with notable improvements outside the buoyant London. The unemployment rate has fallen materially and consumption shows increased confidence. In addition, we have increased our euro area forecast, reflecting healthy growth in Germany and a better than previously expected recovery in Spain and Ireland.

“However, the better the developed economies seem to be doing, the more the discrepancy with the emerging markets becomes apparent. Volatility is likely to persist in the short term as emerging markets find increasing challenges to growth.

“Tapering of quantitative easing is leading to capital outflows from the region, putting a strain on currencies, especially in those economies with weak balance of payments. Consequently, we are seeing a number of interest rate rises to defend currencies which, in turn, will hit economic activity. China’s economy is proving slow to reposition away from investment towards consumption. An extended banking sector and fears of cracks in the shadow banking system are additional worries.

“It is important to note, however, that we do not expect these issues to become another contagious crisis. More emerging countries have floating currencies and higher currency reserves than in previous periods of crisis. The rapid currency devaluations and interest rate rises are already leading to the necessary adjustment of cutting consumption. China does not have a freely floating currency but it is not reliant on foreign capital and has some policy flexibility to help in managing its problems.

“We therefore see the current emerging market weakness as a correction, after a strong rally, which could offer an opportunity to add to equity positions. We prefer exporters over domestic consumption stocks. Outside this, our portfolio themes are little changed, searching for strong, growing companies, payers of good and increasing dividends, M&A beneficiaries and companies well-positioned for the global economic recovery.”

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