Sheldon MacDonald, senior investment manager, Architas
UK equities
UK GDP has fallen slightly in 2016, in line with market expectations. What it shows is that the unprecedented fiscal and monetary stimulus to create a backdrop of improved growth is not working. Uncertainty caused by the EU referendum is an issue. Brexit uncertainty looks set to slow growth in the second quarter as investment intentions are put on hold and consumers adopt a more cautious stance. Overall, we remain cautious on equities and are focusing on defensive income names while UK and global growth splutters.
European equities
Growth in Europe is marginally slower, but consumer spending should benefit from falling unemployment. Despite its unprecedented size, the recent ECB monetary stimulus package had a limited impact on markets and the euro is appreciating. We believe that political risk is increasing and this is not sufficiently priced in. The market should worry more about the migrant crisis, Brexit and an EU-IMF rift over Greece.
Emerging markets
Current valuations in emerging markets are at attractive levels relative to developed markets, although specific risks still remain and we do not yet see this as a real buying opportunity. In Latin America, weak commodity prices and tighter monetary policies are hurting returns. Despite recent investment inflows into emerging markets due to the rising oil price, we remain cautious. Value has rallied hard from a low base but this is not expected to last. We are maintaining a moderate underweight with a preference for Asian emerging markets.
US equities
The economy has been hit by a stronger dollar and weak demand for manufacturing. First quarter earnings may have beaten expectations but, with forecasts having been downgraded, this was a low bar. The consensus now is for earnings and revenue growth not to turn positive until the third quarter. Those predicting a US recession were negative but, on the other hand, we don’t expect a big bounce any time soon. We are maintaining a moderate underweight to the US while favouring large-cap, quality stocks with a domestic bias.
Property
The property sector remains supported by improving economic growth and a general hunt for yield. While the ‘lower rates for longer’ theme is supportive for the sector, potential rate rises may reduce attractiveness. Yields have continued to compress but remain relatively attractive versus gilts and equities, and the sector continues to see positive inflows and positive sentiment, although we see this softening from the end of 2016 into 2017.
