Valentijn van Nieuwenhuijzen, head of strategy at the firm, says a switch from bonds and real estate into equities is already taking place. He also sees a shift within the equity market itself – from defensive yielders to cyclical growth stories. "Next to defensive equity sectors, other previously popular 'yield' plays like real estate equities and fixed income assets have come under significant pressure this year," he said.
"Over the next couple of years, equity returns will start to firmly outperform fixed income returns and global reflation and higher interest rates will create more regulatory room to move towards higher equity allocations for pension fund managers and insurance companies."
"This will signal a reversal of the massive relocation of savings into fixed income assets 'forced' on institutional money managers by the combination of financial crises and regulatory changes over the past 15 years."
The investment manager notes that stable growth stocks in defensive sectors such as consumer staples and healthcare have seen strong inflows over the past few years thanks to their stable growth characteristics and attractive dividend yields.
However, with these equity valuations increasing substantially, the recent correction in these types of stocks – which fell further than the market at large – shows that investors are beginning to shift away from these stable, income-generating but expensive equities towards more attractively valued cyclical companies which offer "growth at a reasonable price".
Performance of indices over 1 month
Source: FE Analytics
"We believe that the trend towards cyclical companies could continue," van Nieuwenhuijzen explained. "Aside from the valuations and the current relative underweight in investment portfolios, there are a number of other reasons for our outlook."
"For instance, due to the upturn in economic data, there is again an upward trend in economic surprise indicators in the 10 largest developed economies. Historically, there is a strong correlation between this indicator and the relative performance of cyclical sectors."
"We are also seeing yield curves steepening, which is also positive for cyclical and value equities. Finally, the earnings momentum of cyclical sectors versus defensive ones has recently also returned to being positive."
His comments are in stark contrast to Invesco Perpetual’s Mark Barnett, who told FE Trustnet yesterday that yielding defensives will remain in demand because the global recovery is not strong enough to support growth in cyclicals.
Van Nieuwenhuijzen is more optimistic about the recovery, however – in developed market economies, at least.
"Overall, ING IM believes that its base-case economic outlook of a consolidation phase followed by a renewed acceleration in the second half of this year remains intact," he said.
"Economic data in the developed world has started to improve recently, with Japan standing out positively in this respect, being the region with the biggest improvement in economic surprise data."
"Also, both the US and eurozone have shown signs of improvement since May, although emerging markets continue to lag, with a continuation of disappointing economic data coming out of China."
On a regional basis, Van Nieuwenhuijzen views the correction in Japanese equities as a temporary phenomenon and expects the Japanese market to return to outperforming equity markets in other regions.
Both with respect to economic and earnings momentum, he maintains that this market enjoys the highest scores of the three main regions – US, Europe, Japan – and points out that its monetary and fiscal policies continue to give it a major boost.
ING is far less optimistic about emerging markets, however, and is underweight across all of its global portfolios as a result.
"One of the victims of the market correction is emerging market assets, suffering from outflows due to less favourable carry-trade opportunities and weak Chinese data," said Maarten-Jan Bakkum, senior emerging market strategist at ING.
Performance of indices in 2013
Source: FE Analytics
"However, more structural issues have risen to the surface too, and the investment manager has underweight positions in both emerging market equities and debt."
"In the developed world, we have seen more structural change since the outbreak of the global financial crisis, which creates room for positive growth surprises compared with the emerging world."
"The combination of better economic data in the US and disappointing growth in China is clearly negative news for emerging markets."
"Growth in emerging markets in the past years has been driven primarily by Chinese demand and carry-trade-related flows."
"Both sources of growth are coming under more pressure now; the former because of increasing evidence of the structural slowdown in China and the latter because of increasing market nervousness about the Fed’s QE policy."
Bakkum says only countries that are able to grow without relying on the key investment themes of the past few years – namely Chinese demand and flows to high-carry emerging market debt funds – will be able to get out of the rut.
He pinpoints Mexico as a market that is already looking in good shape.
"Emerging market countries that are able to increase their endogenous growth potential by tackling their main structural issues have a good chance of escaping a multi-year bear market," he said.
"Currently, in the whole emerging world, our view is that Mexico is the only country with a credible structural reform momentum. For this reason, it has a good chance of escaping the gradual erosion of domestic demand growth that we expect for the emerging world as a whole in the coming years."
"In sharp contrast with Mexico, we find countries like Russia, South Africa and Brazil, where macro imbalances are widening, the investment climate is deteriorating and industry competitiveness is declining. Currently, we see a poor reform momentum throughout the emerging world and few indications that things are improving."
