Having witnessed another standout year for the US, investors in Europe have been stymied by inflationary problems leading to the introduction of QE, while in Japan, further taxation and the evolution of Abenomics hitting business and consumer sentiment.
Scott Berg, who runs the Global Growth Equity Strategy, said equity valuations were looking reasonable and quashed bubble fears, adding: “With developed world equities trading around 15 times earnings, led by US equities trading on 17 times earnings, the days of extreme low valuations are firmly behind us. Despite this, we do not believe that current valuations should be seen as a barrier to an outlook of further, albeit more modest, returns from global equities.”
While cyclical sentiment had been tested in recent months, the manager pointed to out that a greater focus on more sensitive areas of the market had emerged in 2013, balancing what had previously been “an unusually defensive equity market rally”.
Standing by his underweight position in defensive names, Berg said stock-specific opportunities were returning within high-quality cyclical businesses.
“Even without the consideration of earnings expectations, when comparing industrials and consumer discretionary stocks to more defensive peers, valuations are favourable.”
The more defensive nature of the rally could be attributed to a more conservative risk appetite since the financial crisis, he said, which was starting to normalise.
“Valuations rising from crisis levels have accounted for the majority of returns for equity investors. However, this is largely a theme of the past as multiples have reached previous cyclical highs in many cases. We are now entering a more complex and stock/industry specific environment.”
In his $537m (£348m) Luxembourg-domiciled Global Growth Equity Fund, Berg has been adding to his existing overweight position in high-quality European listed industrials and selective consumer discretionary names “as the market reached a point of elevated fear last autumn.”
He also maintained his overweight position in emerging Asian stocks, in industries that “remain fertile with respect to year-on-year compounded profits delivery”.
With fundamentals still dominating behaviour, the equity market – now in growth phase – has further to grow.
He said: “We believe we are in the ‘growth’ phase of the equity cycle – a world of dispersed valuations and corporate outcomes where sentiment will provide opportunity as it shifts stock prices more aggressively. It will therefore be important to be active when market sentiment overreacts to disappointment.”
