Fund managers remain overweight equities despite concerns there may be clouds on the horizon....
Fund managers remain overweight equities despite concerns there may be clouds on the horizon.
Gregor Logan, joint deputy chief investment officer at New Star Asset Management, says interest rates in the US are unlikely to go down this year, despite previous expectations. Meanwhile, interest rates are rising in Europe and the UK, which is likely to dent equities.
In addition, bond yields have risen and now pose more of a threat to the equity market than they have for a while. Logan also says earnings are still demonstrably cheap but valuations have not risen in line with them. He suggests earnings are now at levels which have previously been cyclical peaks and substantial gains are therefore unlikely.
Logan reduced his exposure to equities earlier in the year but, despite his unease at certain aspects of the market, still remains overweight the asset class. He says: "Equities are still the cheapest asset class. Having said that, we may well have a choppy summer but I do not think there are any great inflationary threats."
Tom Elliott, global strategist at JP Morgan Asset Management, also favours equities and says: "Bonds look sickly by comparison." He points out that, according to the FTSE 100, equities had a price/earnings ratio of 15.7 in March 2003 and 13.4 in March 2007, signifying they are cheaper now. Elliott says: "Companies are pricing in an earnings recession but there is no reason to assume there will be one. Equities are looking cheap partly because pension funds have been selling equities to buy bonds and we don't think the out-performance of equities will come until the fourth quarter." Elliott argues there is no reason why interest rates shouldn't start to come down again. Logan also agrees a peak in interest rates is not far off.
Within equities, Logan has started to increase exposure to Japan and is overweight in the UK, anticipating increased M&A activity and cheap large cap valuations. He is neutral Europe and is now neutral the US, having been underweight. Elliott takes a contrasting view and is underweight Japan citing that domestic investor confidence remains low. He is underweight UK and overweight Europe ex UK and US large cap stocks such as Caterpillar, which are benefiting from strong exports to Europe and Asia.
Like Elliott, Logan is still keen on cash relative to bonds. He says: "We are short on bond duration and split between corporate and government bonds. Within that group we favour higher grade corporate bonds and have very little exposure to lower grade corporate and more exotic bonds."
Logan is also keen on international property and thinks that UK property shares look cheap. He says: "People are comparing the discounts to underlying asset value in the same way they did before they became Reits. However, that's fallacious as a 25% discount today is like a 40% discount prior to Reits."
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