25th June 2013
Threadneedle Investments is adopting a more regional strategy as the US recovers but Europe faces headwinds and the UK is set for sluggish growth.
In a note issued this week, Mark Burgess, chief investment cfficer at Threadneedle Investments says: “These varying economic environments around the globe lead us to adopt more of a regional equity strategy than previously.
“In the US, we have added to domestic cyclicals, especially housing related stocks, and are cautious on many defensive sectors such as utilities. In the UK and Europe, we are generally more cautious on cyclicals and are looking to add to some steady growth stocks, e.g. consumer staples, which have recently suffered in the market correction.
“In Asia, we favour cyclicals exposed to the US, such as technology companies, but are wary of some of the China exposed cyclicals, such as steel stocks. In all areas, good growth companies and those with high and growing dividend yields are likely to be in demand.”
Burgess notes that the recent talk of tapering by the Federal Reserve has sharply increased market volatility in all asset classes.
“Quantitative easing has been a huge force in driving markets and traditionally the start of a cycle of monetary tightening has been a difficult time for investors. However, tapering is only a reduction in the level of the Federal Reserve’s monetary stimulus, not a traditional tightening.
“We expect official interest rates to remain extremely low for an extended period. The Federal Reserve’s action would be on account of improved economic momentum, and we believe that there will be very little inflationary pressure in the short term. This combination of better growth, low inflation and still stimulatory monetary policy should be a reasonable background for equity markets. We remain above benchmark in equities and have used the recent correction to increase our Japanese exposure, moving to an overweight position. This reflects the recovery potential we see for corporate profits in the new world and “Abenomics”.”
The firm adds that government and investment grade bond market are showing very limited long-term value and therefore appear vulnerable if the growth outlook improves. “We have been well below benchmark in government bonds for some time but have recently reduced our exposure to investment grade corporate bonds, where spreads are likely to offer only limited protection in the event of rising government yields.
“We expect income hungry investors to continue searching for yield and assets that have lagged other markets in recent years. In addition, the issue of refinancing of UK properties that has hung over the sector for a long period is now underway. We have added to UK commercial property, moving to a small overweight on a medium-term view,” the note adds.