There is more than enough value across developed and emerging markets to deliver double digit returns this year, according to Threadneedle Global Equity Income manager Stephen Thornber.
The strong performance of equity markets in recent years has prompted some fund managers to lower their risk exposure in recent months. However Thornber (pictured) thinks returns in excess of 10 per cent are still possible.
“We do not expect the strength of 2013 to be repeated this year, but think markets can deliver double digit returns supported by modest earnings growth, a few percent dividends and a continued albeit less significant re-rating,” he said.
“We have an essentially positive outlook for equities this year. We see economic growth around the world continuing to accelerate and corporate earnings beginning to recover as well. The last two years or so the expectations have been for profit growth. They haven’t really followed through, but we do think the signs are coming there.”
Thornber is wary of valuations in the US, and has brought his exposure to the country below 35 per cent in recent weeks. However, he points to cheap valuations in Europe as a potential driver for returns. He spoke about this issue in a video with FE Trustnet earlier this month. From a sector point of view, financials are a particularly attractive area for Thornber. He thinks private equity is the sweet spot, and should benefit from improving corporate confidence.
“We have been increasing our weight in banks which offer leverage to an improving economic environment,” he said.
“We have bought French and Scandinavian banks recently, but continue to be wary of banks in southern Europe. We still prefer diversified financials, such as asset managers, to banks.”
“We find stocks such as private equity specialist Blackstone offer strong growth, without the regulatory capital risk facing banks.”
The manager is neutral emerging markets and Asia. Though his reasons for holding companies in these regions are very much long-term, he says 2014 could be the year that they return back to favour following a poor run in 2012 and 2013.
“While we see near-term challenges and slowing growth in Asia and emerging markets, we continue to favour high dividend stocks in these markets which offer an attractive combination of yield, long term growth, and healthy balance sheets,” he said.
Performance of indices over 3yrs
Source: FE Analytics
“Within emerging markets we favour Asian countries such as Thailand, Malaysia, Taiwan and Korea. These countries have had a strong dividend culture for some time,” he said.
“We think dividend stocks within these markets are underrated, because they are unfamiliar to most investors, compared to well-known developed market stocks like Verizon and HSBC.”
Threadneedle Global Equity Income targets a high yield, only investing in companies that offer a yield of 4 per cent or higher. It has had one of the highest yields of any fund in the IMA Global Equity Income sector since its launch in June 2007, currently at 4.7 per cent.
As well as delivering a strong yield, the fund has managed to keep up with the rising equity market. FE data shows Threadneedle Global Equity Income has beaten its MSCI AC World benchmark over a three and five year period.
Performance of fund, sector and index over 5yrs
Source: FE Analytics
“We think of quality as a high, growing, and sustainable yield, and own a range of different types of companies from defensive compounders, to growth and cyclical stocks. We think that a balanced approach can deliver more consistent performance,” the manager added.
Though Thornber is optimistic for 2014, he sees rising interest rates as a potential headwind to markets. However, he says it’s possible for active equity income managers to hedge against this risk.
“Rising interest rates are a headwind for dividend stocks, as the value placed on a dividend yield falls,” he explained.
“However, we believe our focus on high and growing yields gives us some protection, as stocks with attractive growth are less affected.”
“Buying interest rates sensitive stocks is another way to shield the portfolio. We have increased positioning in banks and insurers that benefit from higher interest rates. Low growth sectors such as utilities and REIT’s are most affected by rising interest rates, and we’re generally avoiding those,” he added.
This article were produced in collaboration with and are sponsored by Threadneedle.