Improving fundamentals within the eurozone, China and the US means now is a particularly good time to invest, according to Lazard’s Ron Temple (pictured), who is more positive on the economic backdrop than he has been in more than a decade. 
The co-head of multi-asset and managing director at the asset management firm said this is particularly important as the broader macro picture is becoming increasingly difficult for investors to ignore.
“I’d say this is the most positive I’ve been in 10 years, and that’s primarily because of the eurozone,” he said. “The eurozone has been a question mark for so long. I think it’s premature for the ECB [European Central Bank] to start pulling back but, I think if they did start pulling back very gradually, the momentum would be sustained.”
The ECB is renowned for its use of ultra-loose monetary policy over the years. Its latest – and ongoing – bond-buying programme was launched in 2015 and, during the second half of last year, passed the €1trn mark.
While many investors have expressed concerns in the past that the central bank could run out of tools to maintain momentum, sentiment has become increasingly positive this year as monetary policy appears to have taken effect.
Performance of indices in 2017
Source: FE Analytics
“Early on, when the ECB went into QE [quantitative easing] and it started buying securities, it took rates to negative levels in 2014 and initially the weak euro was part of the story,” Temple explained. “You had the boost to exports and, at the same time, the oil price went down. Admittedly the oil price is much more important to US consumers than Europeans - the average American uses 22 barrels of oil per year and the average European uses 11.
“Still, even at that level, there are savings for consumers. But now if you look at GDP for the last eight or nine quarters, it’s domestic consumption and domestic investment that is really driving the growth.”
In fact, the co-head of multi-asset said European growth is stronger than it currently is in the US. Having said that, he is also positive on the US due to wage growth, increased spending power and a rise of the middle class in the country.
“You have European growth, you have China doing well, if you put those three economies together you’re essentially up to $40trn of GDP, which is over half of the world’s GDP,” he said.
“It’s exciting in terms of the positive macro. In terms of the US middle class - if the thesis is right – the key lynchpin is wage growth because that needs to be sustained for the consumer to spend more money. I do think, looking at the labour market, the percentage of jobs that are unfilled in the US is near a 17-year high.
“This is what gives me confidence that wage growth will continue because you have so many jobs that are open.”
While Temple is indeed positive on the current backdrop, he warned that the next big story for investors over the next 10 years will be populism and how it could disrupt markets.
“I think it’s incredibly important. Brexit was the beginning of it, the US was next, then it was [former Italian prime minister] Renzi and the referendum,” he pointed out.
“The French election was also a rejection of the status quo. En Marche! didn’t exist a year ago, so this is a country that rejected the status quo as well. Investors are breathing a sigh of relief and thinking it’s over because the Dutch election went the right way and Austria just about went the right way.
“I think it’s dangerous to be complacent about this and I do think the middle-class anger is here to stay for quite a while. That’s one of those things that could change how we need to think about investments.”
One of the biggest ramifications populism could have for markets, according to Temple, is the potential reversal of globalisation.
“I think the story over the last 35 years of freedom of trade, mobility of capital and mobility of labour, low interest rates and low inflation is on shaky grounds,” he said. “That can have really important implications for your asset allocation.
“It could mean the macro becomes more important in a global asset allocator’s mind, although it should of course be important anyway.”
When it comes to asset allocation decisions, the co-head of multi-asset said no asset class is cheap at the moment. That said, he argued that equities are less unattractive than debt given heightened inflation risk and the fact many sovereign bonds already have negative real yields.
“Corporate debt is more attractive because you at least have some yield pick-up,” Temple reasoned. “I would say that, actually, the debt market that looks the most attractive is emerging market debt.
“I think emerging market currency-denominated debt looks particularly attractive. The risk factors around emerging markets have come off, they’ve restructured their economies substantially and profit recovery is coming. The emerging market story feels like a pretty good story.
“Even if inflation goes up to 3 per cent, with emerging market debt you’re still getting a high-enough coupon to get a positive return.”
In terms of equities, Temple said the market conditions are favourable for bottom-up stock-picking as there is a significant dispersion between valuations and company fundamentals across markets.
Following the sharp rotation out of growth into value assets at the end of last year and the subsequent snap-back of this trade year-to-date, he is particularly positive on ‘compounders’.
Performance of indices over 1yr
Source: FE Analytics
“We use the word ‘compounders’ and not ‘quality’ because I think ‘quality’ gets misinterpreted as buying dividend-paying stalwarts at any price,” the co-head of multi-asset added. “The consumer staples with a 2 per cent yield which are trading on 25x earnings are not attractive to us.”
Temple is finding the best opportunities within emerging markets given the diversity of companies available, the attractive valuations on a relative basis and its positive economic fundamentals.
“Near-term, we like emerging markets because it is at less of a premium compared to its own history than the other markets,” he explained. “Also, I think earnings are still somewhat depressed in a lot of emerging markets so there is some better earnings upside than in the US and Europe.
“Number three, what we’re seeing in emerging markets is return on capital is actually becoming higher. For years ROE [return on equity] in emerging markets was higher than developed markets, but over the last five or six years it has become lower.
“Part of that is there’s so much investment going on that the P/E [price/earnings] ratio kept growing but the profit wasn’t, so we’ve seen what looks like a turnaround in ROE [return on equity] for emerging markets. There are a number of changing fundamentals lined up that really look quite good.”