Investment Adviser’s Eleanor Lawrie asks discretionary fund managers for their predictions
Guy Foster, head of portfolio strategy, Brewin Dolphin
The FTSE
Prospects for UK equities remain positive, although volatility is likely to be more pronounced as quantitative easing is replaced by the realities of market forces. The improving economic environment in the US and a stabilising eurozone are likely to underpin the prospects for UK shares. An economic recovery in the UK may be unimportant for FTSE revenues, but it will mean that any rise in interest rates and gilt yields remains modest and the valuation gulf between equities and other assets remains attractive.
Japan
Japanese equities are seen as benefiting from ‘Abenomics’. Significantly this would be through the weaker currency and partly the result of greater domestic demand. Currency gains from the yen’s decline will lead to higher profits from overseas. Domestic Japanese firms, however, are also expected to take market share, pass on higher wages and suffer higher import costs. There are signs of success in terms of trade and wages recovering, but that would logically have been achieved at the expense of margins.
Europe/eurozone
Positive revisions to purchasing managers’ indices have echoed other data suggesting stability is returning to Europe – even as it remains mired in an 18-month recession. Mario Draghi’s famous ‘whatever it takes’ speech has continued to apply powerful monetary stimulus to the eurozone, feeding through into lower sovereign, covered bond and corporate rates. The brighter monetary environment is encouraging, although the long-term prospects for the region remain underwhelming and tail risks remain.
S&P 500/US
We remain extremely positive on the US. The economy is creating significant wealth as a result of the housing market recovery and rising employment. Previous drags on growth have included high inflation for non-discretionary spending – principally higher food and energy prices – but these have actually fallen in the past 12 months. Cheap energy is facilitating a manufacturing renaissance that should be positive for the dollar, for US companies, and eventually feed into higher wages.
Property
We have recently added to commercial property, as we believe the improvement in the UK economy is starting to feed through into higher demand for property nationwide. Current rental reviews ought to reflect the more optimistic economic tone and the previous very depressed rents are set to come up for review in the near future as we approach the five-year anniversary of the financial crisis and associated property crash.
Bond yields
We see bond yields rising, but we expect technical demand from pension funds in the UK and macro-prudential regulation in the US to provide structural support for fixed interest. In the US, in particular, the Federal Reserve can accept somewhat higher yields but a so-called normalisation would actually threaten the embryonic property recovery, so the process of adjustment will be managed.
