Against the backdrop of low rates and low returns, Columbia Threadneedle Investments remains neutral and cautious on equities, but positive on emerging Asian equities.
That’s the view of Mark Burgess, CIO EMEA and global head of equities.
Burgess said he has been seeing pockets of opportunity, in particular within emerging Asian equities.
‘In this region, we see better and more stable growth prospects with most EM economies having adjusted to slower trade; scope for local monetary and fiscal support; reduced China fears; and rising capital flows,’ he said in an investment update.
‘Crucially valuations are attractive, with earnings supported by the above factors and rising sales forecasts in 60% of countries in Asia.
‘We are therefore seeing opportunities among high-yielding and high-growth Asian emerging market companies, though are mindful of the risks posed by any US interest rate rise and the impact of the US dollar.’
Central bank policy: good and bad
The sterling could come under intense pressure as global investors flee the currency, the pound having been devalued to a greater extent than analysts anticipated.
Burgess believes it will weaken further to $1.10 next year.
‘The flipside is that both equities and fixed income markets have performed above expectations, largely as a result of ongoing quantitative easing and central bank intervention, both by the Bank of England and the European Central Bank.’
On the other hand, there is a rising fear that the theory of central bank intervention is not matching the reality much, as ongoing monetary stimulus may be harming markets as much as it is helping them.
‘Certainly monetary stimulus is doing little to boost productivity growth,’ said Burgess.
‘Against that backdrop, if inflation were to pick up and interest rates were to rise, there could be significant implications for risk assets, given how a yield-starved world has been forced to hunt for returns everywhere else.
Furthermore, Burgess said governments like the US are looking for fiscal response due to the increasing recognition that monetary policy is doing bad things as well as good things, together with the expensive valuations in the bond market.
‘In the US, the election is looming and both parties appear to have greater appetite for fiscal measures than historically, but this may not come about in the short-term given the ongoing political polarisation, capped by a divisive presidential campaign that will likely see a divided government regardless of who is elected.
‘The forthcoming Autumn statement may raise the prospect for fiscal policies in the UK – where the government has been somewhat critical of the Bank of England's monetary policy – while Europe and Japan arguably need fiscal easing the most.
‘From a bond market perspective the expectation is that curves would steepen materially if there was a regime shift into fiscal.’