15th December 2015
Adrian Lowcock, head of investing at AXA Wealth outlines what investors should expect in the key markets over the coming 12 months and highlights the funds worth considering…
Trying to find value will be one of the biggest challenges for investors in 2016 as the outlook for global growth has deteriorated and concerns over China’s economy continue to weigh on markets.
However, there is value within each market but it will require the skills of the right fund manager to find it.
We continue to believe Europe is attractive for investors. Europe’s recovery has progressed significantly in the past 12 months and the outlook has improved. Business confidence is growing in core European countries – Germany, Italy and Spain with the exception being France, where growth has stagnated.
In 2015 the Euro fell significantly against the pound and US$, driven by the European Central Bank (ECB) starting its Quantitative Easing programme and pumping €60bn a month into the economy. A weaker currency is good for businesses as it makes them more competitive when exporting.
Valuations still look cheap. Companies trade at a discount to their US peers whilst having a better potential to grow their earnings. At the same time they continue to benefit from negative interest rates whilst the ECB has left itself plenty of room to manoeuvre should things deteriorate.
BlackRock Continental European – Manager Vincent Delvin focuses predominantly on large companies, which we believe offer the most attractive opportunities at present. Delvin is a traditional stock picker looking for companies whose value isn’t fully appreciated by the market. He balances his portfolio with investments where there is plenty of growth potential. He has over 10% in both Pharmaceuticals and Banks.
Japan’s dip in growth was expected, although revised figures showed the country avoided a recession in 2015. We expect the country to continue to recover and show growth in 2016.
The government has targeted 2% Inflation and whilst the falling oil, commodity and food prices have kept inflation low, core inflation has actually risen to almost 1%. Prime Minister Shinzo Abe recently reconfirmed his commitment to raising minimum wages by 3% a year, which should also contribute to inflation.
Japanese shares remain attractively valued, particularly following the sell-off in the summer over concerns of a Chinese slowdown and fears of weaker global growth. This continues to weigh on the region and as such we prefer more defensive areas and domestic consumer sectors over exporters.
The political climate has been stable for the first time in years, however with that has come a strong focus on getting the country growing again using stimulative policy measures. We are now starting to see the positive effects of changes in policy.
GLG Japan CoreAlpha – Stephen Harker is a contrarian investor, actively looking for companies out of favour with investors. He uses valuations measures including Price to Book, Dividend Yield and Price Earnings ratio to identify such stocks. He selects companies with strong fundamentals where he believes there is the opportunity for a turnaround. Harker is currently finding opportunities in Banks and Consumer Goods.
Asia & Emerging Markets
The region has suffered for several years as investors avoided riskier areas. Valuations in both Asia and Emerging Markets appear attractive relative to the Developed Markets of the UK and US. However the knock on effects of a rising interest rates in the US, particularly if that leads to an even stronger US dollar, and slowing growth rates in China may continue to weigh on Asia and Emerging Markets in 2016.
Emerging Markets are still suffering from a slowdown in global growth due to their export-led economies and a build-up of debt.
They can remain unpopular for long periods and it takes a patient investor to consider the longer term potential. Drip feeding money in during these periods is the wisest approach as short term volatility is likely to persist.
Schroder Asian Income – Richard Sennitt is a very experienced manager with over 21 years investing in Asia. He is a stock picker and runs a concentrated portfolio of 60-80 stocks. He invests in companies which are financially sound, profitable with proven management focused on shareholder returns. Sennitt has a strong value discipline and won’t buy at any price.
The US enters an Election year in 2016 as Obama’s second term comes to an end in November. Politics already dominates US media.
Whether or not the US finally begins to raising rates this week, speculation arround the interest rate cycle will continue. Forward guidance has not helped and added to the uncertainty often resulting in misinterpretation. In addition few of the key decision makers held their positions back in 2006 when the US last raised interest rates. No-one knows how quickly rates will rise nor when will they eventually peak. Predicting how people will react to interest rate movements will be difficult.
The US economy is still growing although there are fewer positive surprises suggesting continuing growth has been built into expectations. In addition stock market valuations are in-line with their long-term averages. While downgrades to forecast earnings have increased, this is only partly explained by a collapse in profits from the energy sector.
A strong dollar will continue to affect exports and at present we prefer large companies with a domestic bias in the US.
JPM US Select – Manager’s Thomas Luddy and Susan Bao combine statistical analysis with qualitative research with an aim of ensuring investment decisions are not emotional. The portfolio construction is driven by the people not computers enabling common sense to lead. The portfolio is currently invested in US large and mega caps with a focus on technology and Biotech.
Economic data was weaker in the second half of 2015 but the economy continues to grow, albeit slowly. The Bank of England has recently become more cautious on its outlook for growth and inflation in 2016 making interest rate rises less likely in the first half of the year. 2015 saw inflation around 0% and, with continued downward pressure on oil and commodity prices and a stronger pound, it is difficult to predict when inflation will begin to rise. The outlook for 2016 is further clouded by uncertainty over the timing and result of the EU referendum.
Having reached new all-time highs in 2015 the FTSE 100 has fallen back, pulled down by mining companies, which have borne the brunt of falling commodity prices. Concerns over commodity related stocks are set to remain in 2016, however there is still some value in the UK market with Mega Caps looking cheap albeit with limited growth opportunities. In addition there is value in parts of the UK smaller companies market.
Franklin UK Smaller Companies – The approach is very much one of making long-term investments in companies with attractive risk/reward profiles. The managers are willing to take a contrarian stance when market mispricing creates outstanding investment opportunities. While economic and industry drivers are important considerations, the fund is built from the bottom up, with each stock included in the portfolio on its own merit.