Fund Managers Struggle to Find Value

Emerging Markets, IMF editions, October 2015 

Fund managers are attempting to find value and direction in an increasingly difficult global environment. Most are pulling away from emerging markets, but are struggling to find clear opportunity anywhere else.

Standard Life Investments, for example, is expecting “low returns on bond, cash and equity prices over the remaining part of this business cycle.”

“We continue to see a moderate global expansion into 2016, supporting modest corporate earnings growth outside the energy and materials sectors,” said Jeremy Lawson, chief economist at Standard Life Investments.

“Our view remains that a widespread or systemic emerging market financial crisis is unlikely, but the pressure on a number of large developing economies will not disappear quickly. Global GDP growth is expected to improve marginally but remain below trend.”

Arguing that listed equities are particularly vulnerable to disappointing global activity, Standard Life is therefore looking at corporate debt. “Moving up the capital structure towards selected credit may have advantages in this environment,” Lawson said.

There is concern about how robust the USA can be in light of the global environment, with a weak employment report last week contrasting with strong consumer spending numbers. “We remain positive on the domestic economy, but are mindful of the negative conditions for some sectors, given the global backdrop,” said Joseph Carson, US economist and director of global economic research at Alliance Bernstein.

Bernstein’s colleague Douglas Peebles, head of fixed income, warned this week about problems in the debt sector. “Global bond market liquidity is drying up at a time when many investors around the world need it most,” he said. “While banks have been retreating from the bond market investors have been charging into it.” Peebles is concerned that retail investors have crowded into riskier assets such as high yield bonds and emerging market debt in order to earn a return, leaving both asset classes vulnerable to a sudden correction.

“A great many investors are venturing into riskier corners of the credit market,” he said. “If everyone wants to exit at once, prices could fall very far, very fast.”

Barings has upgraded European equities, expecting Eurozone economic growth well in excess of 2% in real terms, with the potential for earnings growth to exceed consensus. It also believes that, although there are negative factors weighing on US earnings in 2015, those will fade away.

That’s about as optimistic as it gets, with Marino Valensise, head of Barings’ Multi Asset, referencing Macbeth and referring to the “three witches” plaguing markets: China, poor communication from policymakers (chiefly the US and China), and volatile equities.

“As fundamental investors, we believe that the answer to the recent market correction rests with corporate profitability,” Valensise said. “In an environment where valuations were average, how likely is it that equity markets will continue sliding in the presence of healthy corporate earnings growth?” Valensise said Barings’ base case was that improving domestic performance in western economies would translate into sustained corporate profitability.

Robert Smith, who runs the Baring German Growth Trust, said this week that the Volkswagen scandal should not affect investor sentiment towards German industrials generally.  “For us, the market dip has been an opportunity,” he said, saying he had bought Daimler shares.

At AMP Capital Investors, chief investment officer Shane Oliver noted the improvement in share markets, commodities and commodity-related currencies over the last week, and said that in the US, “the cyclical bull market in shares looks to be resuming.”

However, he said he was unexcited about the Trans Pacific Partnership free trade deal. “Free trade is great, but watching for the impact of new trade deals on overall economic growth or share markets is like watching grass grow,” he said. “I won’t be changing any economic growth forecasts or investment market expectations because of it.”