Property: I’ve never liked property, but that’s because I started my career in equities and quickly appreciated the benefits of investing in operating entities rather than bricks and mortar. That said, I think property will continue to benefit from the tailwind provided by negative real interest rates. Furthermore, we are finding interesting opportunities outside of core property, whether by geography, lot size, lease length, or property type. Healthcare, social housing and private residential real estate investment trusts can offer very decent yields.
Paul Flood, multi-asset income manager at Newton
UK equities: We retain a cautious outlook on UK equities given Brexit uncertainty and a less stable political backdrop. We advocate minimal exposure to UK financial, extractive and utility stocks. Sterling weakness has been the key catalyst for inflationary pressures, guiding a limited exposure to UK consumer firms. Look for selective opportunities in stocks that offer dependable earnings and less economic sensitivity. This said, the uncertainty surrounding Brexit has created new opportunities to invest in strong, well-managed domestic stocks with good, long-term prospects.
European equities: European equities have seen significant inflows over the course of the year following continued signs of stronger economic growth and less political uncertainty. Against this improving backdrop and the prospect of the European Central Bank tapering its quantitative easing programme towards the latter part of the year, the euro has appreciated against a basket of currencies including the US dollar and sterling which could prompt some investors to pause and reassess their exposure.
US equities: Corporate profits have benefited from dollar weakness, but markets remain fully valued and high relative to historic valuations. Stronger-than-expected GDP figures are a positive sign and could point to it being mid-cycle, rather than later cycle. It is important this continues and for corporate earnings growth to come through and justify high earnings multiples. Sector highlights include technology stocks, which would be a key beneficiary of any corporate tax reform – though this may not be as straightforward as expected.
Emerging market equities: Good inflows have helped EM outperform developed markets year to date, benefiting from dollar weakness and a stronger-than-expected Chinese economy. Relative to the US, there are valuation opportunities within markets such as India and Mexico. Domestically driven economies like India, where firms can benefit from strong population dynamics, as well as broader economic reform led by prime minister Modi, are favoured. India also offers attractive prospects in mortgage finance, given lower penetration of credit in the country has provided room for growth.
Fixed income: Fixed income is currently an unfavoured asset class. Significant parts of the global bond market still offer investors a negative yield. Investors are not being rewarded for the risk they are taking as corporate bond yields remain at near all-time lows – as do spreads above government bonds – leaving investors exposed to potential capital losses. We advise short-duration strategies to minimise interest rate exposure. Duration exposure to Australian and New Zealand government bonds could work where there is the opportunity for further interest rate cuts.
