These areas tend to attractive very different types of investors, with value managers put off by historically expensive stocks in the US and growth managers sceptical of the numerous headwinds to emerging market growth. However Harrison (pictured), who uses a blend of value and growth stocks in his £3bn Threadneedle UK Equity Income fund, thinks both are attractive for different reasons.
The manager believes the outlook for growth in the US is improving, and is likely to boost equity markets, despite first quarter GDP figures in 2014 indicating that the economy shrank by 2.9 per cent.
He says US companies are increasing optimistic and that the earnings pick-up suggests growth prospects are improving, even though interest rate rises are on the horizon.
“If you look across the globe the outlook for the US is amongst the most attractive we can find,” he said.
“The key question is as the cycle matures, is the market robust enough to withstand the uptick in bond yields?”
“We think there will be a modest uptick following policy tightening and so we think the US will continue to do well. On a P/E level it is not looking cheap but from a free cash flow perspective equities are looking attractive.”
A very cold winter, which hit economic activity and consumption, has been blamed by the Fed for the downturn, although critics point to a greater cyclical decline after a strong recovery from the depths of the financial crisis.
“After entering this year with quite a lot of optimism about growth in the US we have walked into a decline in the outlook. Investors have been rotating into the more defensive part of market from growth stocks,” he explained.
“That rotation was pretty savage. However, the data coming out of the US is suggesting the recovery is gaining strength and consumer confidence is improving. The next leg of the US recovery will be the improvement in behaviour of consumers and the housing market.”
The S&P 500 and the NASDAQ took a tumble at the beginning of the year after several years of strongly rising markets. A sell-off in tech and biotech stocks was partly to blame, but both indices have recovered and are up 5.51 per cent and 4.53 per cent this year, respectively.
Performance of indices in 2014
Source: FE Analytics
Harrison can invest up to 20 per cent of his assets outside of the UK, but currently gets exposure to the US indirectly via multi-national companies. AstraZeneca, Royal Dutch Shell and Imperial Tobacco are all top-10 holdings.
He also expects good things from emerging markets, though this is more from a valuation point of view.
“We are reaching a point that, whilst they not attractive for growth potential, valuations are starting to look interesting. As global economic growth picks up, the modest recovery [in emerging markets] this year will be maintained,” Harrison said.
Performance of indices over 3yrs
Source: FE Analytics
“I don’t think growth is going to revert back to anything near historic levels and there may be profit warning risk in some of the high growth stocks in the next 12-18 months. Stock picking is going to be quite a challenge over this period.”
Developed markets have significantly outperformed emerging markets over the past three years. The MSCI Emerging Markets index is down 7.21 per cent over the period whilst the S&P 500 and FTSE All Share are up 45.23 and 30.6 per cent, respectively.
Performance has been much improved over the past three months however; MSCI EM is up 3.76 per cent compared to 3.31 per cent from the FTSE All Share and 2.07 per cent for the S&P 500.
Harrison has indirect exposure to emerging markets via a number of companies in his portfolio. Unilever, which derives a significant proportion of its earnings from developing countries, is a top-10 holding, making up 3.5 per cent of the portfolio.
Despite struggling at the beginning of the year, Threadneedle UK Equity Income is up 5.09 per cent in 2014 and more than 1.5 percentage points ahead of the IMA UK Equity Income sector average over the period.
Performance of fund, sector and benchmark over 3yrs
Source: FE Analytics
The fund is also ahead of its sector over one, three and five year periods.
