While the US was among the best place for sterling investors over the past few years, partly as result of dollar strength but largely owing to a broader recovery in stock markets, the UK market stalled in 2014 with three notable periods of down markets.
Performance of indices in 2014
Source: FE Analytics
Greenwood, who has spent more than 40 years at Invesco Perpetual, is forecasting that the two markets will see the most upside over the course of the year as well as “to the end of the decade”, thanks to their respective improving economies.
Fixed income markets, meanwhile, will suffer due to the progression of the US and UK into a more mature stage of the business cycle, Greenwood says.
“Developed economies are still at their earlier stages of their economic recovery. Typically at the early stages of a recovery, equities and bonds perform the same but in fact in 2014, bonds have performed just as well as equities in some markets,” he said.
“However, we are reaching the end of that stage. Historically in the later stages of the business cycle expansion equities tend to do better because corporate earnings are strong and bond prices are affect by rising interest rates and inflation. That historical lesson will apply again in this business cycle,” he added.
“I think that the current expansion, given the very low inflation and growth rates, will probably extend at least until the end of the decade.”
Given the rapid rise in the US market, and to a lesser extent the UK, many managers and commentators have become sceptical whether they can gain much extra ground. Certain experts, such as the team at Kennox, have warned long-term investors that it is an area that they should avoid at all costs due to current valuations.
However, Greenwood is expecting a broader improvement to continue over the medium term despite short term volatility.
“The economic recovery is in effect only just beginning. The recovery that we thought we had experienced over the past four or five years was somewhat artificial in my view, based on extraordinary injections by the Fed as well as the response of long duration asset prices to exceptionally low interest rates.”
“Moreover, the recovery was pretty anaemic with low wage growth, weak housing and mortgage markets, and sub-par business investment.”
“Now that the banks are able to create credit, and households and businesses seem willing to borrow again, this implies that at last the US can start to enjoy a more normal, self-sustaining recovery.”
Over the longer term, bonds and equities in the US have differed considerable in their performance as they have historically lowly correlated. However, this has not been the case over the past three years, with a broadly upward trend for both asset classes.
Performance of indices over 3yrs
Source: FE Analytics
Greenwood (pictured) says he favours the US and UK markets because of the prospect of steadily improving earnings data as well macroeconomic factors such as falling levels of unemployment.
He says that in the UK a combination of a continuing consumer and corporate recovery means that the upturn in equities of the past five years is now sustainable.
“The UK private sector is now in pretty good shape and we have had six successive quarters of good growth and as this continues and their balance sheets should continue to improve. In the corporate sector, investment has been picking up for a year now and contributing to the recovery."
“I believe the UK is in an intermediate position having achieved a certain amount of deleveraging - especially households, but less amongst the banks -, but in total not as much as the US.”
“However, the UK economy is now growing and the country benefits by not being part of the eurozone, for instance, not being restrained by all of the problems of the single currency zone, but clearly it would benefit from an economic recovery of the eurozone”
He says the US is looking healthy thanks to real growth in gross domestic product (GDP) as well as I promising employment numbers.
“The recovery is not yet an across-the-board boom, so the economic engine is not yet firing on all cylinders. There are clearly areas of weakness still, such as housing and capital spending. However, there has been a marked increase in economic expansion over recent months,” he adds.
Another major reason why Greenwood likes the two markets stems from his bearishness on the other key developed markets; namely the eurozone and Japan.
“Both the Eurozone and Japan have not been nearly so successful either with their balance sheet repair or with their QE operations. This implies that it is not likely that we will see a step-up in the real growth rate like we have seen in the US, although in recent days the European Central Bank finally unveiled its own QE programme.”
“The success of the far-left Syriza party in winning the Greek general election adds another twist to the issue of debt in the eurozone.”
He says despite the recent changes in European politics, global financial markets will witness a divergence between the relatively strong growth in the US and the UK – plus maybe one or two US dependent countries such as Canada or Mexico – and the Eurozone and Japan.
