UK
In contrast to the US, political risk in the UK has been rising. With elections set for May 2015 all eyes will be on the outcome. The UK has delivered strong economic growth in 2014 surprising many, but there are warning signs on the horizon, manufacturing confidence has been deteriorating, whilst the London-led housing boom seems to have run out of steam.
The FTSE 100 challenged all-time highs but has continually failed to breach the upper limit. Exposure to the mining sector and oil majors has led to a sell-off at the end of 2014. As such share prices do not look as expensive as their US peers, but are still fully valued.
Investment idea: Old Mutual UK Alpha
Manager Richard Buxton has an enviable track record. He runs a concentrated portfolio of his best ideas. He is a classic contrarian manager, buying early into unloved sectors such as mining companies where he started building up a position as early as December 2013. It is his patience in investing that allows him to take a longer-term view and wait for sentiment to change.
Performance of fund vs sector and index over 8yrs
Source: FE Analytics
US
2015 will mark the third year in Barack Obama’s second term. However he has lost control of the Senate to the republicans which will make it extremely difficult for either party to make any meaningful decisions. It is for this reason the third year in a president’s term tends to be positive for stock markets.
However, US stock markets begin 2015 more expensive than many of their peers. This is because investors have been willing to pay a premium to invest in US companies as it has led the way out of the financial crisis.
Expectations that the US economic recovery is self-sustaining will be tested in 2015. The stabilisers of quantitative easing have been removed and interest rates are set to rise albeit slowly.
The US benefited from the shale gas revolution but has lost much of this advantage as the oil price fell. A strong dollar is likely to affect exports. At present we prefer defensive sectors in the US.
Investment idea: JP Morgan US Equity Income
The fund is run on an unconstrained basis so is not limited to following a benchmark. The income focus of the fund means that managers Clare Hart and Jonathan Simon look for only high-quality stocks with attractive valuations and good dividend yields.
The fund tends to underperform when growth and risk appetite are strongest. The income focus will provide some protection at current valuations.
Performance of fund vs sector and index since launch
Source: FE Analytics
Europe
European equities are looking quite cheap at the moment, but they are still in the midst of the financial crisis and have further to go than the UK or the US.
It is widely expected that in 2015 the European Central Bank will commence full quantitative easing. Much of this is priced into the markets so the initial reaction is likely to be muted, unless they deliver a shock and awe approach that we saw in Japan. Any delays are likely to weigh heavily on European shares.
The shock election in Greece highlights that there are still plenty of challenges faced by the eurozone and a negative outcome there is likely to raise concerns that Europe could still face a Greek exit (Grexit).
Overall we are positive on Europe given the cheap valuations of equities relative to other markets such as the US, but it could prove to be a bumpy ride. Investors willing to take a long-term view may find opportunities in periods of stress.
Investment idea: BlackRock Continental European
Manager Vincent Devlin focuses predominantly on large companies, which we believe offer the most attractive opportunities at present. Devlin is a traditional stock picker looking for companies whose value isn’t fully appreciated by the market. Devlin balances his portfolio with investments where there is plenty of growth potential.
Performance of fund vs sector and index over 8yrs
Source: FE Analytics
Japan
2014 didn’t go according to plan for Japan. The sales tax introduced in April back fired as spending and growth were bought forward for the economy to nose dive after the tax was introduced.
The effect was significant. Japan entered recession, the Bank of Japan delivered a further round of quantitative easing and prime minister Shinzo Abe announced and won a snap election in December.
He has the support of the people and there is clearly change going on. The Japanese business leaders really do believe that Abe will do whatever it takes to create inflation.
CEOs have never been as positive as they are right now. There is still the need for structural reform but sentiment has changed, the feeling is that this will now happen.
Companies are now also thinking about shareholder returns in a way that has not happened in recent years, which is very positive.
Investment idea: GLG Japan Core Alpha
Manager Stephen Harker is a contrarian investor who looks for out of favour companies, which are well managed and financially solid. He buys them cheap before the turnaround story is recognised by other investors.
The fund is focused on large Japanese companies, with a bias towards those with an above average dividend yield. The fund currently has a bias towards the banking sector and electrical appliance companies, where Harker sees significant value.
Performance of fund vs sector and index over 8yrs
Source: FE Analytics
India
India has been riding on a wave of optimism following the election of Narendra Modi. The country has elected a pro-business leader looking to remove red tape and invest in India’s infrastructure and manufacturing.
Although stock markets have risen strongly in 2014 it could be set to continue. The recent fall in the oil price is good news for India. If oil stays at or below $80 a barrel it could add as much as 1 per cent of GDP to the country. By 2016 growth in India is expected to surpass China.
There are headwinds of course, for example if the US raises interest rates faster than expected that would put pressure on the Indian economy. In addition in 2015 the euphoria of Modi’s election will have passed and impatient investors will want to see changes coming through.
Investment idea: Fidelity Emerging Markets
Managed by Nick Price the fund is a best of breed portfolio with stocks selected from Fidelity’s three regional emerging market portfolios. The focus is on quality, consistency of returns and attractive valuations. Currently the manager has 8 per cent invested in India.
Performance of fund vs sector and index since launch
Source: FE Analytics
Oil
India is not the only beneficiary of a low oil price. Oil has fallen over 40 per cent in 2014 which is good news for global growth. Petrol prices have already started to fall in the forecourts across Britain, which takes the pressure off household income’s and gives a welcome boost to personal finances.
The impact of a lower oil price will be felt most by those countries which import their oil such as Japan, India and Turkey, whilst harming oil exporters such as Russia. A low oil price should also benefit south-east Asia.
Investment idea: Aberdeen Asia Pacific Equity
Aberdeen’s Asia equity team is led by Hugh Young one of the most experienced managers in the region. The emphasis is on quality companies with a clear potential for growth. The approach has been consistent and the Aberdeen team have been able to protect investors by not over paying for growth.
Performance of fund vs sector and index over 8yrs
Source: FE Analytics
Adrian Lowcock is head of investing at AXA Wealth. The views above are his own and should not be taken as investment advice.
