Whether its fears of Fed tapering or simply profit taking, developed markets have taken a downward turn in August, while emerging markets also continue to struggle. Talk earlier in the summer was of a FTSE 100 breaching the 7,000 mark but that seems a long way off now. Chances are we’ve had this year’s big rally, so maybe it’s time to reassess your equities exposure?
Bambos Hambi, head of fund of funds at Standard Life Investments, has recently shuffled equity holdings in his MyFolio funds, adding to relatively undervalued European markets at the expense of emerging markets.
Upside surprises
“Given the low base that Europe is starting from, there is still some potential for upside surprises and this is borne out when looking at European relative growth surprises – Europe has now been providing more positive growth surprises than the US since March,” he says.
“Although it is still too early to suggest that European banks are in any position to push credit through the system in the same way as their US counterparts – the ECB bank lending survey for Q2 showed no improvement at the headline level – there was one important positive to take from the recent lending survey: banks have begun to ease credit standards for consumers for the first time since Q4 2007.
“When taken in conjunction with a diminishing drag from fiscal austerity, which was -1.5% of GDP in 2012, -0.7% in 2013 and falling to zero for 2014, there certainly seems to be scope for continued improvement.”
On emerging markets, he adds that the five largest components of the index (China, Korea, Taiwan, Brazil and South Africa) are all subject to slowing growth and negative implications from tightening monetary conditions in the US.
“Confirmation that the Fed are looking to begin tapering QE as early as September has also removed one of the major supports for emerging markets at the same time as strengthening of the US dollar acts as an additional headwind to commodity importing economies,” he says.
Time for a rethink
Similarly, fixed income has failed to deliver, and it’s clear that many fund pickers have been taking time to rethink their tactical postions with bond funds suffering record redemptions, according to recent IMA figures.
As I wrote last week, GAM is just one of a number of fund pickers to make a shift out government and corporate debt in favour of absolute return vehicles which offer more downside protection. From a yield perspective, Smith & Williamson’s fund of funds team has taken a similar stance sacrificing traditional fixed income assets in favour of closed-ended private equity trusts.
The temptation so far this year has been not to tinker, take an overweight position in developed market equities and wait until a pull back. If that is indeed what is happening now, then it will be interesting to see wealth managers’ plan B as the autumn draws nearer and market sentiment turns colder.
