The current lack of corporate confidence and the prospect of continued lower interest rates are threatening equity investments and investors should expect weaker earnings growth, warns Columbia Threadneedle Investments.
While Mark Burgess, chief investment officer for EMEA and head of equities at Columbia Threadneedle Investments, does not expect an economic recession he says it is clear that life for a number of global industries “is very difficult and likely to get worse”.
He says: “Talk of a recession in industrial profits may sound alarmist, but is probably not too wide of the mark if you happen to be a maker of mining equipment or agricultural equipment, areas where there is significant global oversupply.
“If you produce a commoditised, undifferentiated product, such as steel plate, for example, life is incredibly tough and companies are failing.”
Therefore Burgess,who also co-manages the £282.3m Threadneedle Global Equity fund, says a selective approach in equities “will pay off”, especially in a time where Chinese growth concerns are unlikely to subside.
He says: “We also think that investors will focus more on valuations and fundamentals as global liquidity continues to ebb, and in that world investors should be ready for more stock-specific disappointments.”
However, Burgess remains overweight equities overall in the company’s portfolios as he has been “for a long time”, but he says he will be likely moderating the exposure.
He says: “I feel less positive on equities than I’ve ever been before, I do worry.
“In future, the Federal Reserve will not be underwriting equity markets and despite the likelihood of further action by the ECB, there will no longer be a rising tide of global QE that lifts all boats.”
The investment team currently favours equity investing in the UK, Japan, Asia and Europe and is underweight government bonds both in the US and emerging markets.
He says: “The fact that growth is likely to be subdued means that interest rates will be lower for longer. Indeed, the terminal fed funds rate for this cycle could be as low as 2 per cent. On paper, this is positive for bonds but it is hard to get excited about government bonds given where yields are and the fact that the Fed will be raising rates.
“European high yield does however look interesting, given a meaningful yield spread over government bonds and the fact that the asset class is usually a beneficiary of M&A, unlike investment grade.”