By Percival Stanion, Chairman, Strategic Policy Group
Baring Asset Management (Barings), London
(Barings is the Subadviser to the ASTON/Barings International Fund)
After strong gains in 2013, volatility in global stock markets returned during the early part of this year as markets adjusted to the ongoing reduction in the US Federal Reserve’s asset purchase program and factored in lower earnings expectations. We think this correction, however, should now reduce the scope of any future negative surprises.
The decline was fairly modest among Western developed markets, with buyers quickly returning to take advantage of attractive value opportunities. We believe this trend lends credence to our view that a large amount of money is still sitting in cash on the sidelines for which equities are the most likely destination.
Although equities may be deemed to be slightly expensive in absolute and historical terms, central bank actions are still supportive of growth, and in our opinion the alternatives to equities are comparatively poorer in value. We therefore believe that we are likely to see valuations rise before any slowdown in equity market performance.
Casting a look to individual markets, valuations for U.S. equities remain attractive, with earnings expectations now more achievable than was the case previously. Recent data releases have been somewhat weak, partly reflecting the unusually cold weather pattern as well as a pause in the housing market recovery. Notwithstanding this, we still believe the underlying growth trend is around the 3% level, slightly ahead of the long-term growth rate, but still a sub-par recovery from recession by past standards given the stimulus applied.
To the north, business activity in Canada also led to healthy performance. We believe the market there is improving, although we do question growth prospects over the longer horizon given our cautious view on long-term energy prices in the face of the burgeoning shale gas and oil developments in the U.S.
We believe the Japanese economy will remain resilient in the long run, even as it faces a forthcoming tax rise in April. Combined with the continued weakness in the Yen, we expect corporate profits to likely exceed expectations. We have revised upwards our economic assessment elsewhere in Asia as well, due to stronger export data in Korea, Taiwan, and in India, which should start to show some signs of recovery during the year.
We have revised down our view on Emerging Market equities, however. Most of the recent data from emerging markets have been weak and we have yet to feel the full effect of recent emergency interest rate hikes in countries like Turkey. As such, we still believe there is scope for disappointment and expect foreign investors still holding assets to be looking to sell. While equities in these markets appear comparatively inexpensive, they are not yet compelling to us. We believe that currency weakness and interest rate rises are likely to present better opportunities in bonds, first, before equities eventually respond.
On a sector level, we have downgraded Energy and upgraded Materials. We are wary of the long-term trajectory for oil prices in view of shale gas and oil developments in the U.S. As indicated in the case of Canada, this has important implications for Russia and for Saudi Arabia as well. We think mining companies, which have massively underperformed the markets the past year, have the ability to offset the gloomier outlook for metal and coal prices and shape their own destinies to some extent by curtailing capital spending on major projects. The latest bout of market weakness has also seen their share prices stabilize and begin to outperform.
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.