According to David Jane, co-manager of Miton’s multi-asset fund range, a continued economic slowdown will mean credit stress starts to spread, and equity dividends will start to be cut.
In an increasingly uncertain environment where there is “no such thing as a safe income”, good quality consumer defensives and pharmaceuticals appear to be one of the safest sources of income, according to Jane. “Yields on UK equities have in fact been rising but that masks the likelihood that many of the big dividend payers in the index have, or soon will, cut their dividend,” he said.
Regarding property, Jane said that yields have not fallen anywhere near the amount that other lower risk yields have fallen. Meanwhile, the Miton co-manager avoids certain high-yielding parts of the market that are clearly at risk of dividend cuts: “Resources is a case in point but all areas with high levels of leverage or cyclicality must be more vulnerable than at any point in the most recent past, so we have actively been avoiding these,” he explained.
Edward Smith, asset allocation strategist at Rathbones said that a gradual tightening cycle should support equity markets in 2016. “Historically, global equity markets tend to do well for at least a year after the Fed sets off on a rate-rise cycle. Even in 1994, when Alan Greenspan surprised investors with several rapid, unheralded hikes, the S&P 500 closed higher a year later (although other countries’ bourses fared worse),” said Smith.
According to Smith, investors should be focusing on the outlook for global growth instead of the direction of US interest rates, which is much more uncertain. “We’re looking to a nascent recovery in the eurozone, and the long-awaited consumption effects of the oil price plunge to also improve upon 2015’s growth rate,” he said.
Stefan Kreuzkamp, Deutsche Asset & Wealth Management’s CIO explained that he maintains a constructive view on developed market equities with a slight preference for Europe and Japan over the US. His focus is on the technology, consumer cyclicals and financial sectors. The financial sector in particular has historically increased as central banks raise rates, according to Kreuzkamp.
“In light of the fundamental strength of most DM companies we would, however, view pronounced equity market weaknesses in the aftermath of the Fed hike as a tactical buying opportunity,” he added.
Kreuzkamp said that the Fed starting the tightening cycle shortly after the ECB has further eased its monetary policy underpins Deutsche’s bullish view on the USD, “which we believe to reach and even undershoot parity to the euro in 2016.”
