Managers' views

Positioning for change

Our expert discussed major themes in markets, including the recent rotation, likely impact of Donald Trump, and the prospects for emerging markets.

17/03/2017

Azad Zangana

Azad Zangana

Senior European Economist and Strategist

Johanna Kyrklund

Johanna Kyrklund

Global Head of Multi-Asset Investments

Scope for equity rotation favouring value stocks

While US equities have benefited from a strong upward trend and the “reassuringly expensive” tag over recent years, 2016 saw the balance tilt in favour of value1 stocks and markets that are more sensitive to the economic cycle.

Leadership now is in the more cyclical parts of the world such as Japan and we have also turned more positive on Europe. The Japanese economy is showing signs of improvement, with Japan’s weakening currency as a key advantage in a low global growth environment.

The resurgence of value stocks is the most promising trend for 2017, particularly with the more recent added tailwind of inflation picking up.

We still see support for US stocks, which is necessary for positive sentiment globally for equities, with 10-year Treasury yields below 3%. A move above the 3% level, while a painful transition, would reflect a welcome normalisation of the cycle.

Trump impact

With President Donald Trump officially sworn-in, speculation, not to mention uncertainty, abounds as to what policies he will or will not enact.

The tax cuts Trump has talked about altogether amount to 5-7% of GDP, not including infrastructure spending. The post-election rally also reflected positive economic conditions.

Brexit uncertainty

The initial events following the UK’s referendum decision to leave the EU have confounded the gloomier predictions; however the impact was cushioned by a weaker pound, which may now be undervalued, while delayed corporate investment decisions will be a medium-term drag.

The triggering of Article 50 will only give so much clarity, meaning that a transition deal, potentially lasting four to five years, will be needed.

In regards to Brexit, the rise of anti-establishment, anti-Europe sentiment on the continent is key to watch.

Establishment parties might win upcoming elections, but in the UK, UKIP didn’t need to win an election to get what it wanted.

There is a real underlying trend of anti-European sentiment developing which we can’t afford to ignore.

Improving outlook for emerging markets

The traffic light for emerging markets equities has turned amber, having been red for a number of years.

More so than in equities, there is “definite value” in emerging market currencies, with the attractive carry2 on currencies such as the rouble.

There are cyclical upsides, with Brazil and Russia coming out of recession and cutting interest rates. Countries which have stabilised their currencies after the commodities collapse can now start cutting rates to support growth. This is a sweet spot for investors.


1 A value stock is a one that is trading at a lower price relative to its fundamentals (e.g., dividends, earnings and sales) and thus considered undervalued by a value investor.

2 A carry trade is a strategy in which an investor borrows money at a low interest rate in order to invest in an asset that is likely to provide a higher return. This strategy is very common in the foreign exchange market.

 

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