Large-caps are likely to be the best-performing stocks this year in comparison to their smaller peers due to expected volatility across global markets, according to Aviva Investors’ Multi-Manager Survey.
The report, which was released yesterday, asked the managers, who have a combined AUM of more than £2trn, for their predictions on how this year is going to pan out in terms of sector, market cap and regional performance.
While the survey is now in its fourth year, its findings could be seen as the most important yet given the levels of uncertainty in markets.
2016 has been off to a rocky start due to the continuation of the China slowdown and the collapse in commodity prices, which also led to last year’s sideways and choppy market conditions.
Over the last 27 days alone in fact, the major market indices are down by approximately 5 per cent or more, with the MSCI AC World providing a loss of 5.57 per cent since the start of the New Year.
Performance of indices in 2016
Source: FE Analytics
It probably comes as no surprise then that multi-managers expect an overhang from last year’s volatility, and that this is likely to either remain at the same level or to increase. However, during 2015’s difficult backdrop most regions saw small-cap outperformance relative to blue-chips.
Nevertheless, according to the survey, almost half of the multi-managers questioned (most of whom are based in the UK but adopt a global outlook) expect large-caps to outperform small and mid-caps this year despite last year’s outperformance of smaller stocks.
Performance of indices in 2015
Source: FE Analytics
Sam Slator, head of communications at Chelsea Financial Services, says that the large and mega-cap area of the market is potentially a good hunting ground for investors, particularly those who are value-oriented.
“Large and mega-caps are unloved. After the tech bubble large-caps actually outperformed small-caps – small-caps don’t outperform all of the time,” she pointed out.
“It could happen again. If you’re of that belief, then Old Mutual UK Alpha is a good fund to go into because it’s exactly the story that manager Richard Buxton is playing at the moment.”
“Obviously you have issues surrounding dividend cover, but if you’re investing in a fund that’s not looking for dividends it’s not too much of an issue.”
In terms of sectors, the Aviva survey sound that a majority of the managers think healthcare and financials will deliver the best performance this year, followed by the technology and consumer discretionary areas of the market.
In contrast, 38 per cent of the survey participants expect the materials sector to suffer the most, followed by utilities and consumer staples at 31 per cent of the votes each.
“I’m not surprised by the fact that these sectors are unpopular,” Apollo’s Ian Willings said. “Interest rates are going up so you can see why managers don’t like staples as they’re too expensive, utilities are bond proxies, and obviously materials aren’t favourable because of the state of commodity markets at the moment.”
“I can see why people picked those but I wouldn’t necessarily agree. I think materials could present an opportunity this year, but you’d be a very brave man to jump into that one at the moment.”
Interestingly, the survey threw up divergent extremes in terms of sentiment towards emerging markets – while 23 per cent of those surveyed expect negative returns for 2016, 27 per cent of multi-managers expect a total return in excess of 10 per cent.
Many investors have been bearish on emerging markets over the last 12 months as a result of the low oil price combined with the fact that a majority of countries in the sector are oil exporters. The slowing growth story in China is also a significant factor, as it is the world’s largest importer of crude oil.
Nerves surrounding China don’t just relate to oil prices, though. Out of the multi-managers surveyed, two-thirds expect general concerns related to the region to negatively impact markets this year. More than half of the participants also see general uncertainty surrounding macro headwinds as being the biggest risk to equities this year.
Ben Seager-Scott, director of investment strategy at Tilney Bestinvest, says that if China continues slowing it is likely that other emerging markets will be dragged down in its wake.
However, he points out that if the People’s Bank of China introduces targeted stimulus measures to control the fall, the current market levels will seem oversold on a short-term basis.
Performance of index over 1yr
Source: FE Analytics
“I don’t hold an overly a positive view on the economy, but given what’s happened over the last two weeks, there’s every likelihood to suggest that over the short-term some of the authorities might intervene just to try to restore some stability, which could be positive from oversold levels, even if on a medium-term outlook there are challenges,” he said.
“We’re cautious on the outlook and we did reduce our weighting in emerging markets last year, but we’re holding that underweight position because in the short term you might see a bit of a fillip. We are expecting some short-term stimulus but it’s difficult to say how long it will last.”
Elsewhere within the investable universe, 55 per cent of multi-managers surveyed by Aviva don’t expect any positive inflation within the Eurozone this year, and fewer managers are convinced by the success of Abenomics this year than last year, with 46 per cent of managers backing the policy as opposed to 61 per cent in 2015.
Closer to home, 69 per cent of managers believe that the Bank of England will begin to hike rates this year. The same percentage of those surveyed also believe that the oil price will increase in 2016, while just 7 per cent expect it to remain below $40 per barrel.
Ian Aylward, head of multi-manager research at Aviva Investors, says that it is unsurprising that multi-managers expect a similarly volatile 2016 given the rocky start to the year.
“It is particularly interesting to have such a divergence of views in terms of predicting returns from emerging market equities, which speaks to how increased volatility is causing uncertainty among investors,” he said.
“Given the strong returns that consumer staples have enjoyed over recent years, it is surprising to see it is the sector expected to perform second-worst this year. Perhaps this is due to the lofty valuations – time will tell.”
