As we come to the end of the first six months of the year, what does the second half hold for investors? Investment Adviser asks some multi-asset managers for their views on the main asset classes
David Hambidge – director of multi-asset funds, Premier Asset Management
The FTSE
As is the case with many of the world’s stock markets, we believe UK equities are overdue a correction although it is difficult to see what might trigger this in the short term. To us, large caps now offer better value than mid and small caps and as a result we have a bias towards the FTSE 100 in our portfolios.
Europe
European equities have enjoyed a tremendous run since Mario Draghi’s ‘whatever it takes’ speech in the summer of 2012. However, corporate earnings in the region have continued to disappoint and therefore equities are no longer in cheap territory. For the market to kick on from here we need to see European companies start to deliver decent earnings growth but with economic growth continuing to disappoint, that looks unlikely in the short term.
Emerging markets
Valuations in emerging markets look attractive to us and we have been topping up our positions into weakness this year. However, the sector is notoriously difficult to call over the short term but with economic growth and corporate profits likely to be stronger than most parts of the developed world over the long term, we feel now is a good time for investors to gain exposure.
US
The US is our least favoured equity market as it is, in our opinion, overpriced and over owned. Share buybacks by American corporations (and therefore a shrinking equity market) have clearly supported prices but on a longer term cyclically adjusted basis the market looks very expensive while we believe that margins are also likely to come under pressure. Of course, we’re not sure of the exact timing but we will remain structurally underweight US equities for the foreseeable future.
Property
While assets such as equities have discounted better economic times (and they are therefore in the price), the UK commercial property market is now clearly responding to better economic growth. We believe that prices will continue to recover for the remainder of this year and beyond with the best returns likely to be seen outside London.
Bond yields
The strong performance of bonds has been the big surprise so far with the yields on longer dated paper having declined. However, our central case is that bond yields will drift gently higher over the remainder of the year and next year but do not expect any dramatic spike in yields over the short term. The high yield sector in our view is one of the more vulnerable areas of the bond market as it has now become more interest rate sensitive while still being at risk of rising defaults should the economy take a turn for the worse.
