Slow Growth Ahead
By Percival Stanion, Chairman, Strategic Policy Group
Baring Asset Management (Barings), London
(Barings is the Subadviser to the ASTON/Barings International Fund)
We continue to note the improvements in global economic data, but this time we have chosen not to upgrade our view on the major economies. This is a move away from the pattern of the recent past, when we had been more positive on the outlook for developed markets.
This cautious stance is built on the view that continued political developments in the U.S. will continue to take their toll both on growth and on confidence in the economy. The government shutdown in the first part of October will have had a negative effect on U.S. economic growth, but we believe it also creates uncertainty that will persist into the first months of 2014. We think members of Congress will need to prove their credentials to boost their chances of re-election in the coming round. It is likely that the next round of talks in February 2014 may result in another last-minute deal being put together. With economic data starting to look less robust, particularly in those areas vulnerable to interest rate speculation, we now think that the U.S. will face difficulty in growing at a rate that is above the current trend next year.
We do however believe that the Federal Reserve will make no changes to its monetary policy stance in the near term, and indeed continue to provide liquidity for a more extended period than currently expected. The nomination of Janet Yellen to succeed Ben Bernanke as Chairman of the Federal Reserve only increases our conviction in this, given the perception of her as a proponent of continued financial stimulus. It is not impossible for the current quantitative program to be left unchanged beyond December, or that any reductions in asset purchases will be carried out, meaning liquidity operations in the US will not end until the second half of 2014.
Overall, we expect the macroeconomic environment to be one where growth in developed markets has slowed down from its current pace, while central banks act to maintain their current supportive policy stance to help counteract this modest slowdown.
Looking back over the last 12 months, developed equity markets have enjoyed strong performance, rising in anticipation of further improvements in the economic situation.
With the outlook for growth now looking less favorable, they may struggle to repeat the performance next year. Earnings expectations have yet to be adjusted appropriately in our view to reflect this change in circumstances, with indices likely to struggle as perception meets reality. Thus, we have downgraded our equities stance to neutral in expectation of lower returns in the coming months.
Emerging Markets have been bruised in 2013 by talk of a change in Federal Reserve policy, which closely followed a weakening of economic growth in China. With the Federal Reserve leaving policy unchanged and China now showing signs of more sustainable growth, Emerging equities and their currency counterparts may see renewed strength.
In country terms, we have become less enthusiastic about the prospects for the UK equity market, as we believe it looks less attractive on both growth and value criteria. Despite the caution demonstrated by the Bank of England, the British pound has continued to rise as markets come to expect an earlier rate increase than suggested.
We think that the Consumer Staples sector will continue to underperform the broader market, with ongoing concerns that current valuations do not justify their recent performance. By contrast, Technology is looking more attractive on valuation grounds, even if we do not think any immediate upturn in the capital expenditure cycle is likely.
The information contained in this article is provided by Baring Asset Management (“Barings”), a subadviser engaged by Aston Asset Management, LP (“Aston”). Barings is not an affiliate of Aston and their views do not necessarily reflect those of Aston.
This material is not intended to be a forecast of future events, does not constitute investment advice, and is not intended as a recommendation to buy or sell any security. Investors should consult their investment professional regarding their individual investment program. Since the date of this report, economic factors, market conditions and Barings’ views of the prospects of any particular investment may have changed. Investors should consider the investment objectives, risks and associated costs carefully before investing. Forward-looking information is subject to certain risk, trends, and uncertainties that could cause actual results to differ materially from those predicted. Past performance is no guarantee of future results.