Figures from the Investment Management Association show IMA UK All Companies was the best-selling sector in February 2014, whereas the North American sector was the worst selling. UK equity funds were the best-selling funds for the fourth consecutive month. Although UK and US markets have slumped in recent weeks, Chillingworth says investors should retain their focus on these regions, and is less positive on the outlook for Europe and Japan.
“Our view is that in 2014 the developed world will probably outperform the developing and the US will be the best place to be in for investors,” he said.
“There are lots of opportunities in the US and so consequently it is an area that we continue to favour.”
“Cheap energy through shale gas will continue to be a big advantage and you will see a lot of small and medium sized businesses in the States do well on the back of cheap energy over the next five years.”
The US and UK equities markets have rallied over the past year compared to emerging markets.
The FTSE All Share and S&P 500 are both up, 9.98 per cent and 9.31 per cent, respectively, over 12 months. The MSCI Emerging Markets index by comparison is down 7.17 per cent over the same period, after being hit by market fears of slow-down in China and the tapering of the Fed’s monthly stimulus package.
Performance of indices over 1yr
Source: FE Analytics
FE AFI panellist and managing director of Minerva Fund Management, Paul Warner is also sanguine on UK equities but disagrees with Chillingworth on the US.
He says high valuations in the US market are making it look unattractive in the absence of earnings growth.
“The US is looking quite expensive and I’d be hesitant to invest there before corporate earnings growth is evident to justify that expense,” he said.
“I would have exposure as part of my portfolio but I really wouldn’t say it is the place to be at this juncture.”
“I actually have a slight concern that we might actually see a market correction in US markets, we have had a bit of one but I think it will go a lot further.”
“It started in the NASDAQ but if you look at the other indices they look like they are topping out.”
Warner says if there are wide reaching market corrections in a range of indices he expects the US markets to be the trigger of it.
The tech-heavy NASDAQ Composite has fallen almost 7 per cent in the past month prompting many analysts to claim the pull-back could result in a full scale market correction of over 10 per cent before in the near term.
Performance of indices over 1 month
Source: FE Analytics
Many see the NASDAQ’s fall as signalling US equities are overvalued particularly in the technology and biotech sector.
However, Warner says the fall could also be an example of the ‘sell in May’ proverb being proved correct.
“We are coming into the April/May period and you quite often get a market top in that time period,” he said.
Chillingworth tempers his bullish outlook for the UK by saying that political risk ahead of the 2015 general election could knock back markets.
“UK politics may intervene as we go through the year. We have from the governments point of view, the election clock ticking, with elections next year, and so consequently people might worry a bit more about that as we get closer.”
“Post the European elections, which are likely to not be good for the government, it is going to highlight that a coalition of liberal democrat socialists is a possibility next time around and the uncertainty could cause markets to worry.”
Warner disagrees that the election will be a major headwind for the economy.
“When Tony Blair won the election in 1997 I was really bearish but the markets just keep going up and I was completely wrong,” he said.
“At the moment Ed Miliband is pandering to his party’s left and some stage if he did get into power, he would likely temper that as his predecessor Gordon Brown did.”
Chillingworth, who heads up the Rathbone Recovery fund alongside Marina Bond and James Baker, and the Rathbone Blue Chip Income and Growth fund alongside Alan Dobbie, says he expects a continued slow recovery in Europe, makes it a less attractive prospect for investors.
He also says he is more sanguine than most on the health of the Japanese economy.
“The government has got to continue with its stimulus package and I suspect the reforms that Abe will bring in will take some time, causing some worry in the market,” he said.
“The Yen will be the barometer of how badly things are going. If it weakens then that will be great news for Japanese industry.”
The Rathbone Recovery fund has been beaten both its sector and benchmark over three years, returning 43.59 per cent compared to an average return of 30.55 per cent in the IMA All Companies sector and a rise in the FTSE All Share of 26.23 per cent.
Performance of fund vs sector and benchmark over 3yrs
Source: FE Analytics
It has also been a top quartile performer over both one and three years.
