- Fund manager year-end outlooks can be a useful barometer
- Investors lukewarm on Asia and emerging markets
The economic gloom that has been so widespread this year has, in general, not hurt global stock market returns, with many indices well in the black for 2023 so far. Plenty of overseas indices are well up in local currency terms for 2023: Japan’s Topix is up by a quarter, with US and European indices sitting on gains of around 15 per cent. And from emerging markets to the FTSE 100 there have also been modest gains to bank elsewhere – in contrast to the volatility that has continued to haunt the bond market.
Looking ahead, how much of this is baked into the opinions of professional investors? Our latest gauge of such sentiment, taken via a sample of fund manager year-end outlooks, shows some clear preferences by region and sub-sector. Depending on your viewpoint, this can tell us something about good opportunities, or perhaps just crowded trades. Either way, it is a useful barometer.
Picking up?
The analysis we carried out at the mid-year point found professional investors to be pretty downbeat on the prospects for equities, and some of that pessimism remains. Fund firms are overwhelmingly negative on Europe, in large part due to concerns about the effects of interest rates.
“Europe faces headwinds to consumer and business activity as European Central Bank (ECB) interest rate rises continue to feed through to the economy, while the Russia-Ukraine war, now in its second year, remains a drag on confidence,” says the Franklin Templeton Institute.
The BlackRock Investment Institute’s 2024 global outlook adds: “The ECB is holding policy tight in a slowdown. Valuations are attractive, but we don’t see a catalyst for improving sentiment.”
That sentiment does run counter to the huge returns generated by European equities and funds this year – with names such as European Opportunities (EOT), Henderson European Focus (HEFT) and Man GLG Continental European Growth (GB00B0119487) working out especially well for now.
Fund firms are also reasonably lukewarm on Asia and the
emerging markets for 2024, with a small proportion of our sample taking a positive view here. JPMorgan, which takes a negative view, warns that emerging market valuations are in line with their long-term averages but lacklustre global growth and US dollar strength could cause problems for the sector. On China in particular they warn: “Valuations are cheap and pricing a weak earnings picture but we are waiting for a convincing policy catalyst.”
Sentiment, however, has firmed up elsewhere. 2023 was a rare year of soaring returns for Japanese equities, and many fund firms suspect it has even more room to run. JPMorgan, for one, highlights Japan as the “best cyclical market due to domestic reflation and easier policy”, adding that improving corporate discipline should also help. They believe that Japanese shares still have good chances of a further rerating. But Japan is certainly one area where investors might consider taking profits given the sheer strength of returns this year. To look at some of the investment trusts operating in this space, shareholders in the CC Japan Income & Growth Trust (CCJI) are up by nearly 19 per cent for the year, with the likes of Schroder Japan (SJG) sitting on similar returns. Some popular funds invested in the region have continued to struggle, however, from Lindsell Train Japanese Equity (IE00B3MSSB95) to Baillie Gifford Japan (BGFD).
Other green shoots
The persistent unpopularity of UK shares has proved hard to ignore once again in 2023 but analysis of fund manager positions suggests many still see reasons for hope, with half our sample taking a positive view and the other half a neutral stance.
That in part relates to monetary policy and the broader economic outlook. As Fidelity’s multi-asset team put it in a recent update: "Concerns of an imminent recession have eased and moderating inflation has given the Bank of England the leeway to pause rate hikes.”
Aviva Investors, meanwhile, has pointed to simple valuation considerations, noting: “European and Japanese shares as a multiple of company profits are trading well below their historical averages, while UK shares are offering a discount of around 16 per cent.” However, they have caveated that 2024 could be a difficult year across the board as the delayed effects of interest rate rises are felt.
Turning to the world’s biggest stock market, it’s notable that no firm has taken a neutral stance on the US this time round, meaning both the positive and negative tallies have risen. As ever, this tends to relate to fundamentals: Fidelity takes a positive stance, arguing that consumer spending remains strong even if the labour market proves to be normalising, while JPMorgan argues that US companies are still benefiting from strong cash generation. BlackRock’s Investment Institute, however, warns that any optimism on the US could prove misplaced. “Hopes for rate cuts and a soft landing have driven a rally,” they say. “We see the risk of these hopes being disappointed.”
Bond unbroken
If the narratives on equity regions are pretty mixed, the picture looks clearer when it comes to fixed income. Government bonds remain an overwhelmingly popular trade, even if firms tend to differ on which regions they prefer here. Fidelity’s team, for one, takes a dour view of US Treasuries, noting: “We see limited signs of a hard landing. Inflation is moderating and the Federal Reserve is most likely done hiking. But that is very different from the Fed easing, which is what markets are increasingly pricing.”
Aviva Investors is also bearish on the prospects for US government debt, noting: "The US is one of the most challenged fixed income markets due to the relative strength of the economy and size of its deficit. [But] UK and German government bonds could present better opportunities as economic growth is weak and inflation is dropping rapidly in both countries."
