Key points covered in this podcast
– Why developed market equities may be the pick right now
– The key fundamental factors that are hitting global asset classes
– The potential opportunities in Europe
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Andrew leads a team of strategists, analysts and researchers at ASI, guiding fund managers and clients as they take investment decisions.As someone at the coalface of money management advice, what does he see as the fundamental analysis issues affecting trading and investment decisions today?
‘Well, the obvious ones include the US/China trade war, violence in the Persian gulf, Brexit, but also the general slowdown in the economies of Europe and Japan, not to mention the inability for policymakers to boost nominal GDP,’ he says.
‘The strategic rivalry between the US and China will be a key issue for investors to come to terms with, but a side aspect is the buildup of trade tensions – not yet full blown trade war, but close.’
In the midst of a downturn in manufacturing/trade, Andrew is hopeful that policymakers can respond. ‘We need to make sure this is a saucer-shaped recession and not the start of a nasty V-shaped downturn.’
Should traders be risk averse right now and go for gold, German Bunds and US Treasuries, or take a more optimistic outlook and opt for stocks?
‘Clearly individual investors have their own needs, but we do think a more risk on approach [may be advisable]. After our quarterly global investment group meeting, we had some risk in portfolios and we’ve retained those.
‘We like global equities on the whole; there are risks, we’ve talked about recession risks and trade risks, but we still think corporate profit growth will be positive this year and next.’
Emerging markets vs developed market equities
Some suggest that future growth will come from the likes of China and India while others believe the US, Japan and Europe will continue to lead the way.
‘If you’re talking economic growth it’s clear the big winners will be China and India but we’d add in another emerging markets too like Vietnam and Indonesia.’
Despite the slow economic growth within the developed world, Andrew notes that developed market equities have outperformed emerging market equities over long periods of time, because so many companies in the developed markets have more global than localized influences.
‘Think of the international banks , pharma, tech stocks. These are global names, and also many of the emerging market equities have suffered from the considerable increase in the amount of stock that’s been issued, plus corporate governance problems.’
Choosing carefully is the order of the day. ‘If I’m buying an emerging market region or country am I picking up the growth in that country? Do I actually want to pick up some defensive assets in a particular country? You need to take a more granular approach – it shouldn’t be a consideration of either developed market or emerging market – both have their advantages.’
The future of European equities
It’s no surprise to Andrew that global investors have been pulling out of European equity assets since the summer of last year. ‘They’re seeing a slow growth segment of the world economy, where the political structures are finding it very difficult to make changes and one that’s on the receiving end of whatever the US, Russia or China are doing,’ he says.
However, this might provide opportunities for stock pickers right now with the potential to find stocks ‘unloved and bypassed by others’, Andrew says.
Could the EUR come under pressure? In the short term, it may be a battle between the Fed and the ECB as to who cuts rates fastest and who does more quantitative easing (QE), he believes. ‘Short term the ECB seems to have got ahead because they’re saying not only will they cut rates but they giving strong hints they may ramp up QE too.
‘Further ahead, maybe the Fed manages to cut interest rates further so this dynamic of interest rate differentials and liquidity easing by governments will help to show whether one or the other benefits.’
Andrew doesn’t necessarily believe any currencies are under or overvalued as such right now, but does touch upon the current viability of safe haven currencies. ‘We’ve seen several examples in recent years where the world economy and financial markets are under strain, and people fly into safe havens.
‘There are still some good arguments for JPY and CHF, even if the vaulations aren’t particularly supportive. In overall portfolio construction terms, it may still be worth going long on safe haven currencies to help you sleep at night.’
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