Justin Onuekwusi – multi-asset fund manager, Legal & General Investment Management
The FTSE
The UK economy is growing and we think inflation should remain low and growth strong relative to the rest of the developed world. We expect this will last at least for the next few years before inflation pressures start to build. The impact on the FTSE is less clear. The largest companies in the FTSE receive a significant amount of their earnings from overseas. In some sense, the global recovery could be more important to UK equities, given that more domestic-orientated small-cap stocks have performed well in recent years.
Europe
Europe is now one of the most favoured regional overweights, and these days there is little talk about the risk of contagion of a Greek default and barely a whisper is heard of the crippling unemployment in Spain. Europe has come a long way in confronting its problems, but full fiscal and banking union will take a long time and systemic risks still remain. Inflation remains at dangerously low levels. Risks could still resurface so investors need to carefully weigh these up and be flexible in their asset allocation.
Emerging markets
Taking a medium- to long-term time horizon, the case for emerging markets is compelling when compared with developed markets; increasing urbanisation, better growth dynamics, flexibility to reduce interest rates in a global economic slowdown and government balance sheets in better shape. If one takes a shorter-time horizon, until doubts around a Chinese hard landing and the Ukrainian situation have been resolved investors may want to proceed with caution.
US
The poor weather that plagued US economic data at the start of the year has now passed and we are seeing huge improvement, as expected. In this environment, US equities should do reasonably well as the labour market starts to recover and capital expenditure picks up again. Relative to other equity markets, however, US equities look reasonably expensive and investors may find better value opportunities elsewhere. We would expect US yields to rise as the US recovery picks up.
Property
The UK economic backdrop is improving, credit is more readily available for property investors and we are seeing a pick-up in capital values outside of London. These are all signs of green shoots in the property market. We prefer to invest in a direct property fund because in the short-term real estate investment trusts (Reits) behave a lot like equities and therefore carry equity-like levels of risk. Holding physical property assets gives investors the return of the underlying bricks and mortar without the noise that Reits bring.
Bond yields
Although gilt yields have increased they still remain very low by historical standards – it is entirely unrealistic to expect a similar period of falling yields. Investors need to seek greater diversification from their government bond holdings, taking on more international exposure. Since the financial crisis began, government debt of major western developed markets has been downgraded. It is therefore important to spread that risk across a wide range of countries.
