The recent US equity rally and continued high levels of volatility are leading fund managers to ado...
The recent US equity rally and continued high levels of volatility are leading fund managers to adopt different strategies regarding asset allocation.
While the rebound in equity markets has lowered the attractiveness of the asset class for a number of investors and led them to favour bonds, others feel equities continue to offer greater potential upside. Andrew Milligan, head of global strategy at Standard Life Investments, is bullish on equities although the group has reduced its weighting on US equities from very heavy to heavy.
Milligan says Standard Life Investments upped its view to very heavy earlier in the year, believing investors were too risk averse and taking an overly pessimistic view on the future trend in profits. 'More recently, however, we have become more cautious about the short-term prospects for equity markets. Their rise has taken the edge off the valuation argument and the economic environment is still mixed as shown in some of the recent data and survey evidence,' Milligan says.
'Central banks are still debating the next policy move and corporate profit estimates could come under further downward pressure without the benefit of stronger revenue growth. For these reasons, and to lock in the significant benefits of our earlier move, we have taken our US equity rating back down to heavy.'
Nigel Richardson, senior strategist at Axa Investment Managers, has been buying fixed interest in preference to equities of late, although the group is retaining a neutral weighting in equities and is reducing its marginal underweighting of bonds.
Although he believes the US equity market is approaching fair value, with low oil prices providing a potential kicker to performance and confidence indicators implying a return to trend growth, he has sufficient concerns to lead him to prefer bonds at present.
His concerns lie more with the aftermath of the Iraqi war, which he fears may have choked any recovery in equities. The risk of future fiscal policy expansion failing to offset excess capacity and debt is also a concern, rather than any valuation-based argument.
'Against the background of fair valuation for equities, but global uncertainty, we have maintained an overall neutral position on equities, but with UK equities moderately overweight on valuation grounds,' Richardson notes.
'The main asset allocation change concerns bonds, where we reduced the underweight position in response to the rise in yields in April on the grounds nominal bonds may still be below long-term fair value, but offer increased compensation against global growth risks.'
Milligan is far less bullish on bonds on the back of inflation concerns, anticipating even the best performing bond market, which he expects to be the eurozone, will underperform equities over the course of the year.
As such, he is neutral on eurozone issuance, underweight UK and Japanese bonds and very underweight US fixed interest.
Besides US equities, Forman is running overweight positions in Pacific and UK equities and neutral European, Latin American and Japanese equities.
Richardson shares Milligan's trepidation about the Japanese and European equity markets, noting recent declines in Continental business confidence indicators and capacity utilisation surveys have dashed any hopes of a sharp rebound in the second half of the year.
UK equities attractive on valuation grounds.
US equities approaching fair value.
Third quarter rebound expected in Asia.
Corporate Europe unlikely to rebound.
Inflation eating into bonds yields.
US to deliver trend growth at best in 2003.
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