By Andrew Milligan, head of globnal strategy at STandard Life Investments Stock market investors...
By Andrew Milligan, head of globnal strategy at STandard Life Investments
Stock market investors are feeling battered and bruised after three years of falling markets.
However, managed fund investors have been protected to some extent by the cushioning impact of bonds and property. These asset classes delivered solid returns as equity markets buckled and that diversification has partially offset the weakness in stock markets.
We have reached a point in the cycle at which investors are starting to consider the strength and timing of a revival in stock markets. We have seen a rally from the September low point and bond markets have given back some of their gains. But is the tide starting to turn or is the bear ready to bite back again?
Equities offer reasonably good value. In the UK, for example, a dividend yield of close to 4% compares favourably with a 10-year bond yield of 4.5% and base rates of 4%. In the US, a dividend yield close to 2% compares with cash rates of about 1%.
Corporate earnings, particularly in the US, are also on an upward path, which has historically been a positive driver for equities.
However, the latest global equity rally has been capped by renewed concerns over the health of the US economy and its impact on other regions. The standoff in equity markets has permeated bond markets, which have been trading in a range close to their recent peak.
US economic news has been disappointing and points to a pause in the recovery. Consumer confidence, industrial production and unemployment statistics have all been weaker than expected. In addition, the Federal Reserve has cited deflation as a potential risk and an area for close scrutiny by policymakers.
The Fed acted aggressively in November by cutting interest rates by 0.5% to a 40-year low of 1.25%. Although this has been perceived by some as an admission of the US economy's current weakness, we believe it shows the Fed is serious about protecting growth and preventing deflation.
The housing market remains a strong engine of expansion in both the US and UK should support consumer spending.
Overall, we think market expectations are too gloomy and we remain confident a moderate level of global economic growth will resume in the next 12 months. Consequently, we are overweight in a mix of North American, European and Pacific Basin markets.
The US economy aside, there are other risks to our pro-equity stance. The most important of these are the potential impact on global oil supplies and the world economy of a protracted conflict with Iraq and uncertainty surrounding the policies of the new Brazilian president, Lula da Silva.
Our overweight position in property was retained until recently. We reduced our exposure to the sector because of concerns about an overheated central London office market and its contagion effect.
We also held a relatively high weighting in cash, which we reduced when we added to our UK and US equity holdings. We remain underweight bonds and see little value in government bonds, given our broadly positive outlook for the US economy and corporate profits.
Equities are supported by good valuation.
Property and bond yields insulate the fund.
Federal Reserve takes strong lead.
Risks ahead from Iraq and Brazil.
Bond yield range trading.
London property market overheating.
HL and Liberty SIPP slowest
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