The future is bright for developed market equities but pick your fixed income components carefully, writes Nick Samouilhan multi-asset fund manager at Aviva Investors.
In a series of speeches in May, the US Federal Reserve noted the American economy was improving to the extent that – and conditional upon it continuing to do so – it may be possible to start reducing the extraordinary policy support of the last few years.
In reaction to this more optimistic economic outlook, and with asset valuations far from stretched, markets plunged.
This perverse and negative market reaction was almost entirely driven by technicals and not fundamentals.
If anything, the underlying fundamentals are actually getting better, with the developed world economy starting to become self- reinforcing.
Technicals win battles, fundamentals win wars
However, given financial market addiction to central bank support over the last few years, the statement led investors to panic and sell, which, in turn, set about a cascade of technical selling.
Added to this was a drying up of liquidity, which further pushed down prices as a large number of sellers negotiated over prices with very few buyers.
The reaction was a classic case of market panic and the announcements failed to change our fundamental view that the outlook was propitious for equities. Indeed, if anything, it strengthened it.
This positive view on equities is based on three grounds. Firstly, over the medium to long term, asset class returns are driven by fundamentals, not technicals.
As the Fed made clear, and as data confirms, fundamentals in the developed world are improving.
The US economy is getting stronger (the key reason for the Fed’s statement), Japan is embarking on an unprecedented policy shift in order to drive growth and the UK economy is showing improvement across the board.
Even Europe appears to be getting better – or has at least stabilised.
Secondly, equity valuations were not stretched before the market falls and were approximately 10% cheaper after the fall.
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