The global situation is too strange and volatile to give any predictions beyond the first quarter of 2015, Artemis Global Income manager Jacob de Tusch-Lec says.
“We’re still in a market where giving 12-month outlooks is impossible. We’re in a world where you have a lot of binary outcomes, where things can change quite dramatically.”
Greece is a case in point, he says.
If the presidential vote “goes the wrong way” and German chancellor Angela Merkel remains firm with the country, Greece may once again flirt with eurozone departure.
The instability of that situation, along with the almost-deflationary pressure and low economic growth on the continent is the reason he has cut a three-year overweight position in European equities, de Tusch-Lec explains.
However, he remains slightly overweight in Europe because of its extreme underperformance of other developed markets and the potential for QE and reform to boost it over the next few years, he says.
The slightly overweight position he holds in Europe is something he is “quite worried about” and he stands ready to quickly exit the 21.2 per cent position if it does not work, he adds.
“I think Europe is the dark horse this year, because the underperformance of European to US markets; the premium you pay for US equities – you’ve been here before, but it doesn’t happen often.”
He is offsetting the risk of Europe with a 32.4 per cent slug of US equities.
Aberdeen Asset Management Asian fund manager Hugh Young says Southeast Asian countries offer great growth in 2015 even as China continues to slow.
The 10 Association of Southeast Asian Nations countries have moved out from the shadows cast by their gargantuan neighbour in the past few years by evolving from resource exploitation to value-added industries, Young explains.
“Asean has also been helped by anxiety among foreign investors in China, a country that is fast losing its reputation as a place for low-cost manufacturing,” he adds.
“That’s the reason just outside Bangkok, Thailand has its own version of ‘Motor City’ (before Detroit became a byword for bankruptcy); why more than 80 per
cent of the world’s hard drives are made in Asean; and why your Levi’s jeans may have come from a factory in Cambodia.”
The region’s growth has been brisk, but not rampant so as to put its financial system or property market in jeopardy, he says.
There are challenges afoot, however, with the strong US dollar and expected Federal Reserve rate hikes exporting inflation to the emerging markets.
That means many of the Asean central banks will be forced to tighten policy, crimping growth. Also, there are worries that a lack of investment in education has made the countries too dependent on low-skill manufacturing that can as easily offshore as it arrived, he adds.
Axa Investment Managers strategists analysts Mathieu L’Hoir, Ombretta Signori, Gregory Venizelos and Franz Wenzel agree that Asia is “the place to be”.
United States equity markets look “rather unstable” as they are expensive relative to their peers and earnings are already higher than their long-term trend, the Axa team says.
Prices are unlikely to re-rate higher due to the wages rising in pace with productivity, the need to make more capital investment after years of lean spending.
Instead a 5 to 10 per cent return can be expected from revenue growth stemming from the bustling economy which equates to a neutral recommendation, the team says.
Investors should be overweight Japan as the juggernaut continues its monetary-led attempt to get back on its feet, they add.
“Even if the long-term economic prospects in Japan are still blurred, the Kabutocho should continue to benefit from a decent tailwind,” the team says.
“The acceleration of the Bank of Japan’s quantitative and qualitative easing programme will push real yields and the yen even lower, encouraging Japanese investors to turn toward equities.”
Axa strategists are also bullish on Europe, and trust in European Central Bank chief Mario Draghi’s ancillary promise to “do whatever it takes” to expand the bank’s balance sheet.
Draghi, of course promised to do “whatever it takes” in July 2012 to keep the eurozone whole.
Building the ECB’s assets will “guarantee” lower borrowing costs, while a weaker euro will boost corporate earnings, the Axa strategists says.
“The only caveat is low commodity prices, which will most likely depress energy and materials’ earnings,” the team says.
“In addition, corporates should be able to benefit from significant operating leverage. Barring a significant turn for the worse in the economic backdrop, euro area equities should post higher returns than their US peers, thus corroborating a longer-term overweight position.”