The recent hiccup in investor sentiment should not develop into anything more dramatic, writes Rob Burdett and Gary Potter, co-heads of multi-manager at F&C investments.
The first half of 2013 has seen markets make strong progress helped by a relatively calm backdrop in the eurozone, benign economic data and support from central banks.
However, recent weeks have seen a hiccup in sentiment and, as we look forward to the second half of the year, the picture is one of divergent prospects for economic growth across regions.
Japan has dominated the headlines so far. Japanese equities saw a very strong run until late May, driven by hopes for the new government led by Shinzo Abe and his policies designed to stimulate the Japanese economy. Combined with quantitative easing (QE) from the Bank of Japan (BoJ), the impact on the yen and Japanese stock market has been dramatic.
The Upper House elections in July should give Shinzo Abe an even stronger mandate to push through legislation in pursuit of his reforms. The economic data in Japan continues to improve and we still have a positive view which is unlikely to change until we see the extent of the reforms to be announced later in the summer.
Ahead of this, it would appear the market has become nervous Japan will again disappoint, following a 20% decline from the late-May peak. However, for now, we have confidence Japan is on the brink of an economic pickup, particularly given the size of the QE programme in place. We continue to be overweight Japan.
The US Federal Reserve has continued with its policy of QE along with ultra-loose monetary policy to offset the impact of the fiscal cliff and spending cuts, which have weighed on economic data in the second quarter. However, the underlying economic data remains reasonably robust and corporates remain in very good shape.
The recent fears over QE tapering and the impact on markets are justified, though the Fed will only pull back on QE if the economic data is sufficiently strong. Even if the Fed does taper QE, this does not necessarily mean interest rates are going to rise. We remain positive that the US economy is continuing to pick up, with tailwinds from the recovery in the housing market, increased consumer
confidence and the renaissance in energy.
We remain overweight North America. Europe and the UK have seen their economics show some signs of improvement in recent months. We expect this trend to continue. The easing of austerity across the eurozone will be positive, though we should be cognisant that this is from a very low base.
The ECB and Bank of England will remain supportive and have scope to intervene further if needed. Structural issues remain in the eurozone and the path to banking union is very slow, but the ECB has given solid support at the sovereign level.
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