Gen-yers increasingly interested in SMSFs.

The demand for SMSFs among younger people is growing apace, according to the latest research report commissioned by the SMSF Professionals’ Association of Australia (SPAA) and Russell Investments.

The report, titled “Intimate with Self Managed Superannuation”, found that although people aged over 50 still comprised the largest number of SMSFs, the strong growth was in the younger demographics.

“It is the 41-50 age group that continues to be the largest source of demand, as cited by three-quarters of financial planners. This is followed closely by those in the 31-40 age group, where two out of three advisers are expecting greater demand from them.

“It is this younger demographic that has exhibited strong growth over the past three years. They are interested in the longer term and have a good understanding of the short-term issues versus the longer term opportunity,” the report says.

Intimate is the fourth consecutive report on the state of the SMSF sector based on two online surveys developed by CoreData in partnership with SPAA and Russell. A total of 1,267 Australian consumers were interviewed, of which 385 were SMSF trustees and 882 did not have an SMSF.

SPAA CEO Andrea Slattery says: “The continuing strong growth in the younger demographic is both significant and encouraging. It means more young people want to take control of their retirement incomes, and, for the professional advisers it creates the opportunity to grow their businesses.

“As the report found, the popularity and awareness across superannuation remains high as evidenced by the sector’s growth in terms of FUA, accounts and members.

“Although the proportion of superannuats looking to establish an SMSF in the next five years has dropped from 12.3% from 17.3%, the intention still remains high over the longer term with 14.3% of the non trustees likely to set one up over the next five years.”

Contribution caps and constant legislative change, however, are still taking their toll. Slattery says that for the fourth successive year, SMSF trustees have said that they under-invested in their future retirement by $16 billion a year because of these factors.

On the investment front, the report says the expected movement out of cash in 2013 because of the strong rise in equities simply did not occur. In 2012, the allocation to cash was 33.9% and in 2013 this figure had only fallen to 31%.

Australian equities did not benefit, however, witnessing a slight decline from 37.1% to 36.1%, with residential property benefiting with a rise from 5.6% in 2012 to 9.9% in 2013.

Based on these numbers and the fact that international equities rose sharply in the 2013 calendar year, the report says there is a real opportunity for financial planners to educate trustees about the benefits of diversification “but also how risk as a concept is not related to asset classes along the risk curve but is also related to risk as an opportunity cost”.

Scott Fletcher, Director, Client Investment Strategies, Russell Investments says: “It is clear from the report that investment advice is most valued by SMSF trustees.

“It’s not all about picking stocks and sectors; SMSFs need to tap into strategic investment advice to help them achieve their desired goals and deal with complex issues such as sequencing risk, and the impact of this on retirement outcomes. There is a real opportunity for advisers to step up into this role.

“Like all investors, the preferences and biases of SMSF investors have a significant impact on their strategic asset allocation and their ability to link goals to outcomes. This is an underappreciated aspect of portfolio design that advisers can shed light on. Often, SMSF investors will jump straight to the vehicles they prefer to invest in, bypassing the all important goal-setting and asset allocation steps in the process.“

The report adds that it will be a challenge for financial planners to educate trustees about the potential opportunities available in other asset classes outside of cash and direct Australian equities.

“However, given trustees’ dislike or lack of understanding of diversification, planners need to demonstrate the value of other asset classes and how these can play a role in helping trustees achieve their retirement objectives.

“This will be a difficult challenge, however, as three in five trustees claim they have a “strong” or “very strong” knowledge of investments compared with non-trustees, with the majority (51.9%) using their own research process,” the report says.

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All set for a global recovery.

Modest global growth expected as the world economy saddles up for a recovery, astute investors will think laterally about portfolio construction. 

Global G3 economies are heading towards synchronised, moderate growth in 2014 with a likelihood of low returns, according to the Annual Global Outlook report, released by Russell Investments.

The report is produced by Russell’s global team of investment strategists, who offer their investment insights and economic forecast for the coming 12 months, as well as in-depth analysis of key fiscal components within the global market.

According to the 2014 report, the low return environment will be representative of narrowed credit spreads, equity markets that trade at full valuation, and global bond yields with room to rise.

Australia along for the ride

Russell’s Senior Investment Strategist for Asia Pacific, Graham Harman, said markets were priced well over the past 12 months, which is set to result in moderate single digit returns for 2014.

“While we may be headed towards a low return world, this is not a set and forget year. In this climate, active asset allocation becomes more important as astute investors need to think laterally about portfolio construction,” he said.

Over the coming year, equities are expected to outperform fixed interest and cash, with key drivers being the continued global recovery, a benign inflationary backdrop, investor preference for equities and corporate regearing.

As the investment landscape continues to evolve, Russell identified some key themes for the Australian market in 2014:

• The ‘Great Rotation’ has some way to run, as investors will continue to move out of bond and income funds, and into equities – this is spurred by relative returns and by the low-inflation, growth recovery backdrop
• Emerging markets are expected to perform better in 2014, with China and Japan acting as engines for growth in the Asia Pacific region
• Cash and bonds will both play a key role in portfolio management during this time of lower returns and heightened volatility, as downside risks for bonds appear limited and cash gives investors the chance to buy opportunistically on market dips
• The weakening Australian dollar provides support for the domestic economy. With the AUD still overvalued by 20 – 30 per cent, unhedged international exposures will deliver capital stability and return consistency.

Lower returns no cause for concern

Russell believes the prospect of lower returns does not equate to market pessimism as active management can still produce strong returns for investors.

“There is a challenge now when it comes to achieving a rate of return at a level of risk investors can survive – there are still opportunities for good returns if investors use the full arsenal of a multi-asset investment strategy, including a sharpened focus on managing downside risk and an actively managed and globally diversified multi-asset portfolio,” Mr Harman said.

For more information, please see the 2014 Annual Global Outlook.

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Zenith Senior Investment Analyst Andrew Yap said, “Zenith assigned a greater number of ratings across the Diversified sector in this review than in previous years. This coincided with the emergence of further quality offerings within each of our ‘Real Return’, ‘Single-Manager’ and ‘Multi-Manager’ categories.”

“Zenith attributes the continued growth in the number of strategies offered across this sector to a refocusing of business priorities, increased investor demand for tailored multi-asset strategies, and further legislative burden”.

When asked about changes Zenith had seen in the sector Yap said “Market conditions have further evolved since Zenith’s 2012 Review. Notwithstanding the challenges that continue to face many global economies, sentiment has broadly improved, and along with this volatility has moderated.”

“Zenith attributes this market dynamic to the significant fiscal programs and less traditional monetary policies pursued by governments and central authorities in an effort to restore investor confidence.”

Yap added, “These stimulatory market conditions are however posing numerous challenges for sector participants, and by consequence, Zenith has observed a number of developments across this sector”.

A summary of the key developments is provided below:

• Changes in Strategic Asset Allocation (SAA) are becoming more frequent and meaningful. Such change appears to be in contrast with the longer-term capital markets assumptions upon which SAA’s have traditionally been founded.

• Investment managers are finding it more difficult to identify large directional trade ideas, an area that has proven particularly fruitful in recent years. This raises questions as to whether sector participants will be able to generate similar returns in the years ahead.

• Sector participants are assigning greater resources to the identification of relative-value trade opportunities. This coincides with enhancements made to models which seek to quantify market imbalances owing to sentiment and other idiosyncratic factors.

• In an effort to enhance portfolio efficiency, a growing number of investment managers have sought to assign greater weights to discrete investment strategies such as smart beta.

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Growth expected in 2014: Russell.

Russell Investments is forecasting modest gains for equity markets and higher bond yields in 2014 following growth in major world economies, according to capital markets research released by the global asset manager.

The fourth quarter Strategist Outlook & Barometer report offers in-depth analysis of key economic and market indicators, with the insights helping to guide the firm’s multi-asset portfolios and services.

In the report, Russell cited politics – including uncertainty about U.S. monetary policy and political pressures globally – as the biggest threats to performance across asset classes in 2014.

Russell continues to favour equities over fixed income, with strategists remaining moderately positive on equity markets globally.

Domestically, Australian large cap equities have outperformed Australian fixed income by 23% (total return basis) over the past 12 months. According to Russell Investments’ Senior Investment Strategist for Asia-Pacific, Graham Harman, this pattern is expected to hold over the next 12 months, albeit at declining strength, as lackluster conditions and mixed economic signals affect Australian markets.

“We expect the low interest rates driving house prices to be balanced by a slowing domestic economy in the wake of a resource-sector boom,” he said.

The report also shows European equities are favoured over U.S. equities, while emerging market equities look increasingly more positive, possibly offering double-digit earnings growth in 2014.

Global Head of Investment Strategy at Russell Investments, Andrew Pease, said the forecast is for synchronised growth across the US, Japan and Europe for the first time since 2010.

“Looking ahead to 2014, we expect to see a strengthening low-inflation recovery that favours equities over bonds, despite relatively full equity market valuations,” he said.

Regional optimism in the Eurozone and Asia-Pacific despite political concerns

While Eurozone equities still appear relatively cheap and capital continues to flow amid the easy monetary policy of the European Central Bank (ECB), Russell’s strategists argue vigilance is still warranted. However, since the Eurozone’s key long-term problems have not been solved, these positives only marginally outweigh the negatives.

In the Asia-Pacific region, the investment climate continues to improve in Japan as Prime Minister, Shinzo Abe, appears successful in turning the economy around. Though stimulus and spending challenges remain, real GDP is at 4%, and monetary growth is at 3% year-on-year at the end of the third quarter, after bottoming near zero at the beginning of 2013.

Elsewhere, China’s economic rebalancing is performing as it should, and the Asia-Pacific region as a whole appears poised to respond positively to acceleration in the U.S. and/or European growth in 2014.

Asset class views

Russell’s global strategy team has a moderately positive view on global equity markets, while bond yields have fallen sharply in response to the Federal Reserve’s decision not to wind back their bond buying program earlier, a move that Russell believes may be an overreaction. Within regional equities, Russell prefers European and Japanese equities, followed by South-East Asia, the U.S. and Australia.

Mr Harman said emerging markets could get a renewed shakeout when talk of Federal Reserve tapering resumes, but believes most currency adjustment has already occurred across the vulnerable economies.

“Looking at the path ahead, we believe additional volatility may continue, but this could be leveraged as an opportunity to increase tactical equity positions, such as within multi-asset portfolios,” he said.

For more information, visit  the “Strategists’ Outlook and Barometer” report.

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Investors switching on optimism about sharemarket.

Rising confidence about global growth prospects, coupled with the fall in the Australian Dollar (AUD), has led investment managers to be optimistic about the share market, according to new research produced by global asset manager, Russell Investments.

The Investment Manager Outlook (IMO) is a biannual survey which captures the views and insights of around 30 Australian fund managers on market sentiment and their views on sectors, styles and upcoming trends affecting investment strategy.

Bullish sentiment is rising for both international and Australian shares, with managers preferring international shares (71%) over Australian shares (65%). 71% of managers now consider Australian shares to be fairly valued.

According to Russell Investments Director of Client Investment Strategies, Scott Fletcher, this shift in sentiment shows that managers have greater confidence in the global recovery.

“With improving U.S. economic data and signs of growth picking up in the Euro-zone, it appears managers believe the worst is over and share markets can move higher in the medium term,” he said.

The survey also reveals 74% of managers are positive about the Coalition’s victory, as many expect more consistent policies and the removal of mining and carbon taxes to reduce uncertainty and increase investor confidence.

However, while the recent election and change in government is considered a positive, Mr. Fletcher warns issues remain in the marketplace which could create market instability in the short term.

“Considering the ongoing discussion around Fed tapering and the geopolitical unrest, we remain cautiously optimistic on the domestic share market in the near term. Events such as the U.S. government shutdown and potentially higher bond yields are significant short term global risks that might cause market volatility to rise,” he said.

The survey also reveals the exporting sector of the market to be a major beneficiary of AUD depreciation over the past six months. This is expected to continue as 81% of managers believe the dollar will settle between 81 and 90 U.S. cents in the next 12 months.

Declining commodity prices, economic growth and diverging interest rate movements are the key themes that managers expect will drive the performance of the AUD going forward.

Manager preference for cyclical assets continued on a sector level, with the biggest shifts in bullish sentiment in energy, up from 42% in the last survey to 77%, and materials, up from 39% to 58%. The energy sector has

benefited from recent oil price gains, which is expected to continue provided the Chinese and U.S. economies stabilise and improve.

On the flip side, A-REITs, domestic bonds, cash and the AUD are some asset classes which managers continue to remain bearish.

The results of the survey largely indicate fund managers consider share markets to hold the best investment opportunities both at home and overseas: Russell’s strategists broadly agree with this among signs of market recovery, but investors need to be wary of near term risks which add uncertainty.

“At Russell, we believe in the importance of closely monitoring and responsibly adapting to changes in the market environment in order to manage risk and capture investment opportunities as they arise. Responding is one thing, but the ability to separate ‘noise’ from ‘substance’ will help keep investors focused on the main game and avoid knee-jerk reactions. This is where global access to capital market insights becomes critically important in informing portfolio changes” Mr. Fletcher said.

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Retirees in the drivers seat with investment choice.

Alliance approach provides financial planning practitioners support in building innovative retirement income solutions for specific individual investor objectives

Financial advisers are no longer content with the traditional benchmarking approach to investment returns and are instead seeking solutions that cater to the specific needs of investors – particularly retirees, according to Russell Investments and echoed by Matrix Planning Solutions.

The trend is reflective of nascent shift in investment objectives: investors want portfolios that are designed to achieve outcomes that are more closely aligned their goals, rather than simply trying to beat a common industry benchmark.

In a move designed to address this demand, Russell Investments has partnered with Matrix Planning Solutions, a leading independently owned financial planning network, to develop and launch the PartnerShip Funds – five actively managed portfolios designed to deliver different outcomes depending on the investor’s life stage and needs.

Since officially launching in December 2012, all five PartnerShip Funds are ahead of their annual objectives on a pro-rata basis. The PartnerShip Growth Fund has achieved the strongest performance, posting a return of 10.8% for the year to August 2013. This is well in excess of its official target objective – the Reserve Bank of Australia Cash Rate + 4.5%.

Russell Investment’s Managing Director Private Client Services, Siva Sivakumaran, attributes the funds’ success to the collaborative approach of the partnership which is reflected in the effective operation of the joint Investment Committee.

“The Investment Committee has been established to ensure open discussion between the two parties. It’s made up of representatives from both Russell and Matrix Planning Solutions who meet regularly to discuss market developments and quantitative research which is then made available to advisers,” Mr Sivakumaran said.

Matrix Planning Solutions’ Managing Director, Rick di Cristoforo, said the partnership has provided a platform for advisers to access quality investment information which is used to devise strategies that accommodate the life-stages and investment needs of individual retail investors.

“It reflects the commitment from both Russell and Matrix Planning Solutions to provide advisers with the most effective tools to maximise the likelihood their clients realise their investment goals,” he says.

In aligning with Russell Investments, Matrix Planning Solutions consulted heavily with its adviser network who indicated more tailored client solutions were needed in achieving business growth amid a sustained period of reform.

Other key performance figures for monthly returns for the year to 31 August include:

• PartnerShip Balanced Fund posted a net return of 7.69%, which is 3.72% in excess of its Reserve Bank of Australia Cash Rate plus 3% target (pro-rated)
• PartnerShip Debt Management Fund posted a net return of 7.67%, 4.26% above its target of 80% of the Australian Banks Average Variable Mortgage Rate (pro-rated).

Through the partnership arrangement, retail investors are able to benefit from Russell’s unique capabilities in its five core areas – capital markets insights, manager research, portfolio construction, indexes and portfolio implementation.

Mr Sivakumaran said as the investment landscape grows increasingly complex, there is a shift towards outcome-oriented investing which addresses the need for products focused on objectives understandable by the investor.

“Along with the global multi-asset surge, it becomes evident that Russell has a lot to offer through our experience in crafting adaptive portfolios that delivers the right outcomes for investors,” he said.

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  Like-for-like: Russell compares four quarters’ worth of after-tex results for the first time.

  Research validates objective of Stronger Super to compare like-for-like returns.

• Super fund members set to benefit from mandatory focus on after-tax performance. 

Pre-tax performance is not the most effective means to evaluate investment returns, often materially understating the real value of franking credits to investors, according to new research by global asset manager, Russell Investments.

The Russell’s After-Tax Survey – produced quarterly – polled Australian equities managers with a range of strategies and styles, comparing returns on an after-tax basis for institutional and retail investors. This is the first time four quarters’ worth of results have been made available, highlighting investment trends and themes over a longer-term.

Russell Investment’s director of after-tax strategies, Raewyn Williams, said the research reinforces the benefit of the recently introduced Stronger Super reforms, which require the mandatory consideration of after-tax investment returns.

“For both advisers and the end investor, the results support the need to be mindful that the after-tax performance of investments can be materially different to pre-tax returns. The assumption that pre-tax performance measures are good enough is misguided – investors need a more complete picture of investment performance” she said.

The survey results suggest a move to an after-tax investment focus for Australian equities can generate additional returns annually on taxable accumulation options – around 45 basis points for conservative fund members, 65 basis points for balanced option members, and 80 basis points for growth option members. Further, with investors enduring a volatile market environment, the consideration of franking credits supplies a relatively reliable return stream. Ms Williams said while focusing on after-tax performance is now mandatory for superannuation investors, after-tax investing is not standard practice amongst fund managers. The fund managers who have elected to participate in the survey should be applauded for their efforts to promote after-tax measurement and management as a valuable part of the investment process.

“The survey results demonstrate there is value for funds – and their members – by using after-tax strategies within their Australian equities portfolio. Focusing on the end goals that matter to members – after tax returns – portfolios can be holistically designed, constructed and managed to take into account the impact of tax. Ultimately it’s the members of super funds who are going to reap the rewards via larger super fund balances.” she said.

Highlights from the survey include:

• Large cap managers generated additional alpha from franking of 27-53 basis points over the full year (on average)
• Franking added 1.1% to superannuation accumulation and 2.2% for pension returns (on average)
• Russell Investments RDV ETF ranked first for the income category and its After-Tax Australian Shares
• In some instances, active managers appeared to be underperforming the market based on pre-tax measures but in fact returned or beat the market.

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Transparency misleading when trading at the fix.

Investors need to reconsider the point-in-time (PIT) strategy when trading foreign exchange as transaction costs can outweigh the apparent transparency, according to a paper produced by global asset manager, Russell Investments.

The paper, Does Trading at the Fix fix FX?, explores the viability of using a fixing price for FX transactions, and whether it provides the best outcomes for investors after considering factors within the trading process. PIT execution involves buying and selling foreign currencies at a particular time or times, generally the same time daily, with the most common benchmark being the WM/ Reuters London 4pm fix, also referred to as the London close.

According to Russell Investments Head of Foreign Exchange, Michael DuCharme, the popularity of PIT execution strategies is spurred by investors’ desire to trade at a transparent price.

“As the FX market is an opaque and largely unregulated environment, investors lack market trade information and the ability to verify times at which trades are done. Many consider trading at the fix as a way around this as there is an exact daily price, making it easier to value international portfolios and compare them to other international portfolios and benchmarks,” he said.

Mr DuCharme believes many investors are using these benchmarks without considering the broader risks and implications on the trading process. “We have found investors focus on minimising tracking error to the point where some of the fundamentals of trading, such as volatility, liquidity and bid-offer spreads, can be overlooked.”

Some key issues with employing a PIT trading strategy include:

• Best execution – because exchange rates are random, it is unlikely that the best price of the day will consistently be observed at a particular time such as the London close
• Position adjustment and manipulation – dealers can offer better – or worse – prices in an attempt to reduce their risk heading into the close. More recent press has described how dealers allegedly manipulate the market through ‘banging the close’, the practice where dealers execute a large number of trades close to fixing time to influence the rate
• Declining liquidity – popular trading times represent times when currency markets are transitioning from one global region to another, which is often marked by declining liquidity and increased volatility.

Russell advocates the use of alternative benchmarks in FX trading such as a volume-weighted average price (VWAP) which is determined by the actual trades an investor executes and then comparing that outcome to the average rate for the traded currencies during a day or over a transaction period.

Russell’s Head of Implementation Services in Australia and New Zealand, Daniel Birch, said the paper identified significantly higher volatility for an investor’s selection of trading at a point-in-time compared to a volume weighted approach.

“As most investment managers trade currencies to fund international security transactions rather than to profit from volatility swings, tolerating the excessive risk is unnecessarily costly,” he said.

Russell’s Managed FX Trading program employs the agency model which is designed help investors capture more of the return benefits of an international portfolio allocation, with processes in place to provide greater transparency and operational efficiency to their funds.

Russell’s Agency FX services utilise the firm’s expertise in portfolio implementation, and by integrating it into a broader investment program, clients can achieve diversification within a multi-asset portfolio.

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Jeff Hussey

Global asset manager Russell Investments announced today the appointment of Jeff Hussey to the role of global chief investment officer.

Pete Gunning, who held the global CIO role since 2008, will return to his native Australia to lead the firm’s vitally important Asia-Pacific region. In his new role, Gunning will succeed Chief Executive, Asia-Pacific Alan Schoenheimer, a 22-year Russell veteran, who will transition to a non-executive advisory role. In addition, Gerard Fitzpatrick, currently a senior fixed income portfolio manager, will succeed Hussey as chief investment officer, global fixed income. These changes will take effect on October 1, 2013.

As global chief investment officer, Seattle-based Hussey will direct Russell’s investment management, implementation and research activities worldwide. He brings to the role more than two decades of asset management experience with Russell, including a decade as CIO, fixed income, during which he had direct responsibility for more than $60 billion in assets and oversight of the firm’s cash management strategies. Hussey will also serve on Russell’s Executive Committee.

“Jeff has deeply rooted investment experience in a variety of vital leadership, portfolio management and analyst roles at Russell, including a successful 12-year track record with our bond funds,” said CEO Len Brennan. “He’s a 20-year veteran at Russell steeped in the rich tradition of our multi-asset investing expertise.”

Meanwhile, Gunning will return to Sydney to manage the Asia-Pacific region, which is integrally important to Russell’s business. He brings a mix of global perspective and in-depth understanding of the region to the Chief Executive, Asia-Pacific role. Under his tenure as global CIO, he helped transform the firm’s investment proposition to focus on world-class multi-asset solutions and successfully led Russell’s asset management and portfolio implementation teams through a period of historically challenging economic and market conditions. Gunning joined Russell in its Sydney office in 1996, and will now have responsibility for the firm’s business activities in Japan, Korea, China, Taiwan, Singapore, Australia and New Zealand. He will continue to serve as a member of Russell’s Executive Committee and report to CEO Len Brennan.

“The appointment of our former global chief investment officer, an extraordinary investment professional, to lead the Asia-Pacific business demonstrates Russell’s commitment to this region,” said Brennan. “Pete’s knowledge of Asia-Pacific markets and experience as a global CIO will prove valuable as Russell pursues its growth strategy in the region to deliver customized multi-asset solutions to investors.”

For his part, Alan Schoenheimer has made a number of significant and valuable contributions to Russell’s success over the past 22 years, serving most recently as chief executive, Asia-Pacific.

“Throughout his career at Russell, initially as a senior consultant in our Sydney office and later in institutional and retail funds leadership positions, Alan served our clients with an emphasis on bringing Russell’s innovative multi-asset, outcome-oriented solutions to bear across a wide range of asset classes and strategies,” said Brennan, adding that Schoenheimer will continue to work with him on strategic projects in a non-executive role at the firm.

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Growth in US equities predicted.

Despite the strong upward trend in global equity markets, equities should be favoured over bonds and cash, although equities are expected to outperform bonds by a smaller margin than in the first half of 2013, according to Russell Investments.

This sentiment is contained in Russell Investments’ 3rd Quarter Strategists’ Outlook and Barometer, a quarterly assessment of global capital markets. It features in-depth analysis of key economic and market indicators by Russell’s global team of investment strategists, who help guide Russell’s multi-asset portfolios and services.

In the report, steady growth is projected for the U.S. market over the next 24 months, forecasting the U.S. economy has sufficient spare capacity to grow without generating inflation pressures. Within global equities, Russell strategists prefer Europe and Japan due to slight improvements in the Eurozone, the success of ‘Abe-nomics’ in Japan, and the overall attractiveness of Japanese and European equity valuations relative to U.S. valuations.

Russell Investments senior investment strategist, Asia-Pacific, Mr Graham Harman, said Asia-Pacific offers opportunities in Japan, China and Australia.

“Japan is experiencing strong GDP growth for 2013, and the Chinese government is prioritising reform over short-term growth,” Mr Harman said.

Locally, while there are encouraging signs in Australia’s housing sector, the economy faces a slowdown.

“The overwhelming challenge domestically is to absorb the impact of a precipitous decline in resource sector-related capital spending, and to take up the slack in export growth, in housing, and in domestically oriented industries,” he said.

Russell Investments global head of investment strategy, Mr Andrew Pease, said economic growth in the months ahead will remain modest but robust, with Europe emerging from recession and Japan set to accelerate.

“The gains in global equity markets and rises in bond yields mean that we head into the second half of the year with equity markets offering reasonable, but not outstanding value, and with bond markets less dangerously overvalued,” he said.

Emerging markets may underperform in the near-term, but prospects are improving 

Conditions in emerging markets remain challenging for equities, given the strengthening of the U.S. dollar (USD), falling commodity prices and general geopolitical upheaval in countries from Brazil to Egypt. However, Russell’s strategists believe an export recovery and a settling of the current uncertainty around China could serve as catalysts for a rebound in the medium-term.

“Emerging markets offer good value and could rebound as exports recover amid stronger growth in developed economies and if EM central banks allow their currencies to depreciate against a stronger USD,” Mr Pease said.

Despite some challenges, U.S. economy likely to generate stable growth 

Russell’s strategists believe that U.S. employment gains will likely average 200,000 jobs per month for the next 24 months. The first increase in the federal funds rate likely won’t take place until the fourth quarter of 2015. However, the June revision to the annualised real consumption figure, which lowered the growth rate from 2.9% to 1.8%, implies less momentum going into the second half of the year.

Another challenge will be the U.S. Federal Reserve’s (the Fed) wind down of quantitative easing that is likely to begin in 2013, though it is the end date that is most significant. Russell believes the Fed is unlikely to hit their growth, inflation and Treasury yield targets this year.

Many investors fear that the current economy resembles 1994 where the Fed policy tightened dramatically, leading to a sudden rise in yield rates and choking equity growth. Russell Investments’ perspective is that the economic conditions today parallel 1984 more closely, when a bullish U.S. economy forged the way for stable global growth. Russell expects the U.S. economy to be characterised by moderate inflation, a low recession risk and stable growth.

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