The global equity income manager(pictured), who heads up the open-ended £649m Henderson Global Equity Income fund and the closed-ended £50m Henderson International Income Trust, says value persists in global mega-cap equities but says investors’ more bearish positioning is helping defensive assets outperform.
“What has been really fascinating this year is the best performing sectors have been 10-year gilts and property. Investment grade bonds have performed well and oil has performed very badly. Gold, until recently, had performed well,” he said. According to FE Analytics, this year gilts are up almost 15.4 per cent, US investment grade corporate bonds rose 11.02 per cent and the average fund in the IMA Property sector has returned almost 10.39 per cent. The MSCI World gained 9.75 per cent.
Performance of indices in 2014
Source: FE Analytics
By comparison gold and oil have sold off, more recently in the case of the yellow metal and since June in the case of oil. Earlier gains in the year mean gold is marginally up – 0.99 per cent – but oil has plunged 21.4 per cent.
“It has been quite an odd year because you have had equity markets edging up but all the other things represent a world that is getting nervous about growth and more nervous about inflation,” Lofthouse said.
“For 10-year bonds to be up significantly and gilt yields to be back down at 2 per cent in the US, the recovery that everyone was hoping for earlier in the year and the interest rate rises that they thought would come, just haven't come.”
“Defensives have somewhat led the market up when normally defensives only beat it when the market falls.”
He says this represents a conundrum for investors.
“If you have a recovering world, stock markets should go up and you should need more oil and need more commodities but actually you have a world where we are recovering slowly but wage growth isn't coming through as quickly as we thought.”
Commentators have argued that data, particularly in the US and UK, suggest a positive outlook for further economic recovery and support the bull case for riskier assets such as equities, but note that it is not all plain sailing.
Rowan Dartington Signature’s Guy Stephens recently said that while the data is optimistic for developed economies, the lack of wage growth is a potential worry for markets.
Recent employment data from the US marginally missed analyst’s forecasts but the previous two sets of numbers were upgraded, which he says demonstrates the recovery has legs.
However, with a large proportion of new jobs being lower paid, a question mark over where and when wage growth will be seen in the US and UK is seen as worrying.
Stephens believes it may be the case that under pressure companies have stripped out more costly, experienced staff to replace with younger, well-educated, highly IT-literate workers.
While this means cheaper labour and therefore lower costs and higher profits, it is also leading to lower government income tax receipts and stagnant average wage growth.
But Lofthouse says the lack of wage growth is partly a good thing for risk assets, especially equities, because it is likely to mean interest rates do not need to rise as quickly, which would potentially inhibit sentiment and slow markets.
“At the same time expectations were perhaps a bit too high. Growth hasn't really come through,” Lofthouse said.
The confluence of expectations and worries around the eurozone were partly a cause of markets selling off in September, but equities have since rebounded and are close to their pre-sell-off highs.
Performance of indices since 4 September 2014
Source: FE Analytics
Analysts at Bank of America Merrill Lynch (BofA ML) say the recent "huge" inflows into equities suggest "market psychology is shifting from fear to greed" and warn that this could be the start of hubris among investors.
Almost $40bn from global investors has poured into equities over the past two weeks alone.
"Confidence is broadening that US growth and QE can and will solve all, and that any 2015 normalisation of QE will be devoid of negative consequences. It won’t, despite the triumphant tone of the ‘newbie bulls’," they said in a recent note.
BofA ML argues that 2014 and 2015 will be "transition years" where the bull returns seen between 2009 and 2013 start to moderate. Positive returns are possible, but they will be lower than those previously seen and come with greater volatility.
They added: "Shorter-term, risk assets can rally further as policy and data reduce cash levels into year-end. The near-term 'pain trade' is higher government bond yields rather than lower stocks."
"But the big hubristic 'tell' will be gold. A sudden gap lower in the gold price to below $1,000/oz should coincide with the final thrust higher in stocks, both indicating capitulation of the 'stubborn bears', the end of the 'melt up' and the next opportunity to get tactically bearish."
"We increasingly fear next year’s highs in stocks come early."