Across the group's 100-plus portfolios it runs for institutional and wholesale mandates, worth about $50bn in assets under management, head of multi-asset allocation Toby Nangle said too much uncertainty remained and earnings had yet to deliver.
That said, the group was still overweight to its benchmark allocation by around 2%, indicating the asset class was still favoured, just with a more tempered optimism. The reduction was moved into cash, bringing the previous benchmark underweight up to neutral. In general terms, UK and Japan were the favoured regions although the affected portfolios tend to be UK, US or European domestically focused.
High valuations without earnings delivery
Summer earnings season will be crucial, he added, rather than upping weighting earlier only to be left disappointed if the negative earnings revisions were right and stocks failed to deliver.
Chief investment officer Mark Burgess said in his latest asset allocation update: "Equity valuations remain attractive, but they are less compelling than they were. We increased our underweight to Asian equities on the China concerns and increase our overweight to Japan on the belief that the impact of the consumption tax will be lower than feared. Although we remain overweight equities, it would be fair to say we are less optimistic than we have been for some time."
Nangle expressed the complexities of tackling the emerging markets. While the group said this was the "only asset class showing any real value", with valuations trading at 30% discounts to developed markets on forward multiples, there were clearly structural issues to bear in mind, including China’s reputation for sidestepping some core economic woes.
"China had non-performing loans that made up around 30% of its GDP and they managed to sweep that under the carpet. The Chinese are very good at sweeping things under the carpet," he added.
Chinese growth has slowed with its current debt-to-GDP fast approaching 60%. The two outcomes might include a "messy" solution, which might be a type of 'financial accident' or the "less messy" – putting in place measures of sustainable growth models and effective austerity.
