5th December 2014
For investors, 2015 will pose more downside risk and they will need to be careful to avoid volatility spikes across all asset classes – here’s a run down of where to invest in the new year.
David Coombs, head of multi-asset investments at Rathbone Unit Trust Management, said January ‘beckons a paradox; a year of growth that’s less than exciting but one with few dull moments too’.
‘We expect downside risks to be much greater in 2015 and for volatility to spike across all asset classes,’ he said. ‘In 2015, investors will need to be nimble enough to take advantage of these spikes and may need to utilise diversifiers, such as hedge fund strategies, to help protect their portfolio.’
He added that with weaker global growth and depressed inflation, interest rates may remain unchanged in the US and UK, which income investors must be aware of.
Overall he is ‘constructive’ on equities but expect there to be ‘a very marked decoupling between those markets that deliver and those that do not’.
‘We remain overweight equities, albeit with more risks attached,’ he said. ‘Our underweight to UK equities is our only significant change, year-on-year, and we’re holding it on a two-year review. We remain overweight the US and Japan. We’re underweight Europe and the emerging markets. We’re neutral on Asia, including China.’
In terms of fixed income, Coombs said all markets lack value compared to the risks being taken which would ‘normally’ lead to a ‘very underweight’ position – a consensual view.
‘But the view on the performance of fixed income 12 months ago was also very consensual and very wrong,’ he said. ‘The biggest risk to a negative outlook is that inflation could surprise on the low side. If inflation continues to fall, real yields will increase, even if bonds trade sideways from here..’
He said holding AAA to AA rated corporate bonds should ‘act as good diversifiers in a portfolio that is overweight equities’.
‘While it may feel uncomfortable, there’s quite a strong case that fixed income markets could end 2015 where they started but with an increased real return,’ said Coombs. ‘Within this space we remain underweight high yield on the premise that if there is a rise in rates, they are likely to peak earlier than they have in the past, raising the possibility of high yield underperforming a lot sooner than the market is currently factoring in.’
What will happen around the globe in 2015?
Coombs has laid out his predictions for emerging markets, Asia, UK, US, Europe and Japan.
‘Emerging markets now represent nearly 40% of global GDP and just over 80% of the global population – so we can’t ignore it,’ said Coombs. ‘But the risk of currency crisis contagion in 2015 are key reasons why we remain underweight. It is fair to say that the easy money has been made.
‘Volatility in this asset class has been unusually repressed…and we may have to accept a greater allocation away from the BRIC market in order to access more lucrative opportunities, so long as corporate governance standards and liquidity risks are appropriate.’
Coombs likes: Somerset emerging market dividend fund for total return, Genesis emerging market fund for strategic growth, and Goldman Sachs next 11 fund for enhanced growth.
‘We are neutral on Asia but do see potential for some marginal upside,’ said Coombs, although he warned there is ‘no panacea for China’s underlying liquidity and corporate governance problems’.
His preferred market in Asia is India, which has seen a stockmarket surge thanks to domestic and foreign investors. Coombs said there was ‘much work to be done’ in India but ‘there is potential for better news ahead’.
Coombs likes: China AMC China opportunities fund and JP Morgan India investment trust for enhanced growth, Edgbaston Asian equity fund and Veritas Asian fund as well as Scottish Oriental smaller companies trust all for strategic growth.
‘We believe the Bank of England’s decision-making process has become increasingly influenced by the political outlook,’ said Coombs. ‘Low demand and booming risk assets have caused corporate to use capital for market speculation at the cost of much-needed investment. This has clear implications for productivity and potential economic growth.’
Fiscal tightening is inevitable whatever the colour of the government and with a rise in rates on the cards, the two running in tandem would ‘have negative implications for UK consumer discretionary earnings in industries such as retail and leisure’, said Coombs.
‘We have remained underweight the UK and sterling versus the US dollar on an 18-24 month view,’ he said. ‘Throw in the very real prospect of a hung parliament and the possibility of two elections, and everything points to a turbulent time for UK assets and, more specifically, for domestic companies.’
Coombs likes: defensive fund Troy income, and Miton multi-cap income fund for strategic growth.
The US is Coombs favourite market for next year.
‘While other economies continue to struggle on a structural level, economic data suggests that the worst of the US soft patch is behind us,’ he said. ‘It is the only market we believe will continue to benefit from a perpetual easing cycle in the form of sinking energy prices, declining rates and a strengthening currency.
‘On a forward-looking basis, the US is not very expensive, given our overall growth projections.’
Coombs likes: Legg Mason Clearbridge US aggressive growth fund and Legg Mason Royce US small cap opportunity fund for strategic growth, Allianz Technology trust also for strategic growth, Biotech growth trust for enhanced growth and Polar healthcare fund for total return.
‘Our view on Europe is unchanged – we are pessimistic based on confused imbalances and inconsistencies in fiscal policy,’ said Coombs. ‘Furthermore, the European consumer remains under a huge amount of pressure. The decline in energy prices is providing some buffer, but it’s not enough/ Given the lack of co-ordination, no growth visibility in peripheral Europe and a fragile banking system, it is difficult to be bullish on the euro.’
While he said being underweight Europe may at times ‘hurt us tactically’ he was willing to take the hit.
He warned: ‘Investors are at risk of buying a value trap if they jump in on cheapness alone. Europe is an almighty mess.’
Coombs likes: Barings German growth trust for strategic growth, and TR Europe growth trust and Henderson European focus trust both for enhanced growth.
‘Our overweight in Japan is now driven by valuations, as our fundamental resolve is low,’ said Coombs. ‘Before this sounds like too much of a contradiction, the political situation looks less stable and the economy is creeping back into recession. Ultimately, this means a murky visibility of earnings. Positives include the huge amount of quantitative easing being thrown at the problem…But the tipping point for us is purely valuation.
‘We are sticking with Japan for now but will not hesitate to reverse our decision if earnings start to deteriorate. As with Europe, the boundaries between long-term structural problems and more cyclical ones may become confused, so experienced stock-pickers are crucial.’
Coombs likes: JP Morgan Japanese income trust for strategic growth.