Emerging market sovereign bonds have become overpriced following a surge in inflows as investors hunted for higher yields, City Financial's head of multi-asset Mark Harris has said.
Harris, manager of City Financial's MultiManager Growth fund, MultiManager Income fund, Diversified and Dynamic funds, which total just over £100m, said mid-cap companies in developed markets are the best hunting ground for quality growth opportunities.
"We believe that there will be a moment when investors attach a premium to companies with structural growth prospects," he said.
By comparison he said emerging market sovereigns appear overpriced.
"Emerging market sovereigns appear overpriced and many developed sovereign bond markets sold off heavily in the first weeks of 2013.
"A statement from a leading Japanese pension scheme indicating that they may sell Japanese government bonds if the currency weakens further is very worrying, as they are the primary support keeping yields and therefore funding requirements low," he said.
Investment grade and high-yield credit also looks "very expensive", he said. "The January sell off is a prescient warning of what is likely to come."
Harris remains optimistic on United States (US) housing, though he believes most of the good news on the housing recovery is now being priced into US agency mortgage bonds.
"We remain optimistic on US housing, although the stocks have now priced in a lot of the near term good news.
"Housing is generally affordable and, combined with better employment prospects, this should support consumer spending. Our view is that the US equity market will remain strong on this continued economic improvement," he said.
He is also positive on the corporate sector in general, seeing many companies restore their balance sheets to create substantial cash reserves.
"As confidence grows, it is likely that we will see such cash put to use in variety of ways, including share buy backs, acquisitions and increased dividends," he said.
"As investors search for yield, we believe that dividend growth companies will go to a premium over the general market."
Harris believes the term "great rotation" - which has been coined by some to describe what they say is investors' move out of bonds and into equities - has been "widely abused".
"We have yet to see convincing evidence that a wide constituency of investors are switching out of bonds into equities. If anything, there appears to be a marginal move from cash to equities and bonds," he said.
A number of trusted technical and fundamental analysts are suggesting that equity markets are likely to suffer a minor correction, according to Harris.
"Sentiment and risk taking behaviour is at the levels that are commensurate with corrections, i.e. investors are over optimistic.
"We think that we will witness a minor correction, but this will represent an opportunity to buy equities, as we believe that they will be seen at substantially higher levels."
Harris said his focus is moving towards cyclical equities, where he expects to see upside surprises in this quarter.
He is balancing this with an increase in his weighting towards dividend growth strategies to take advantage of lower volatility and more value characteristics.
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