The asset manager has started to overweight emerging market (EM) and Asia-Pacific (Asia Pac) equities and will continue to add to its position if the markets continue to remain unsettled by concerns such as the looming US fiscal cliff.
Mark Burgess, chief investment officer at Threadneedle, pointed out that Europe continues to worsen from a macro perspective, as austerity measures in a number of countries hold back the region’s growth.
Furthermore, the US faces up to 4% being shaved off its GDP unless the impact of automatic tax increases and government spending cuts that come into force at the start of 2013 is moderated.
“Against this backdrop it may be surprising to hear that we are becoming increasingly more constructive towards equities and have recently gone moderately overweight, initially increasing our weighting in EM and Asia Pac,” Burgess said.
“Indeed if the markets continue to be unsettled by the situation in the US we will use the market weakness to increase our equity exposure further.
“The key driver to our decision is valuation and what is currently discounted. Although the backdrop remains very challenging, it is not new news and in many respects we are closer to a resolution of the uncertainties.”
Burgess argued that the uncertainty being created by the US fiscal cliff is expected to be resolved shortly and predicted that its impact could be lessened by at least half. In addition, the regime change in China is close to being completed while an “unexpected negative outcome” in Europe is growing less likely.
“What is true is that against this backdrop, interest rates are going to stay close to zero for the medium term and high yielding equities are likely to remain well supported. Other valuation metrics remain attractive, and the robust balance sheet strength is another positive,” he added.
“Although not our central case, it is just possible that we get a positive growth surprise in the global economy in the second half of 2013. If that is the case, equities will start next year with significant positive momentum.”
