What the Fund Managers are Saying
In this section we look at the House view of one of the leading Fund Managers operating in Ireland and importantly, what’s their current view on the markets.
| Government bonds | ||
|---|---|---|
| US Treasuries | The economy’s strength, especially a tighter labour market, should enable the Federal Reserve to start raising interest rates from late 2015. However, it will use forward guidance to control the pace of yield movements. | LIGHT |
| European Bonds | An environment of low inflation, modest economic growth and QE supports European bonds. A partial resolution of Greece’s debt situation has temporarily eased pressures on peripheral bonds. | HEAVY |
| UK Gilts | The asset class is vulnerable to interest rate increases as economic growth remains firm. Manageable inflation pressures and central bank guidance can anchor rising bond yields. | NEUTRAL |
| Japanese Bonds | The long-term inflation outlook is slowly deteriorating as the government aims for reflation. However, the Bank of Japan’s sizeable bond-buying programme should prevent yields rising significantly. | LIGHT |
| Global Inflation-Linked Debt | Inflationary conditions are subdued in many developed economies, although valuations require careful examination. Investor worries remain about future inflation due to ultra-easy monetary policies. | NEUTRAL |
| Global Emerging Market Debt | Dollar-denominated bonds are Heavy, as spreads show better value, while local currency bonds are Neutral as careful examination is required of individual currency and spread factors. | HEAVY/NEUTRAL |
| Corporate bonds | ||
|---|---|---|
| Investment Grade Debt | US credit spreads have widened substantially, creating an opportunity over very low-yielding Treasuries. European corporate debt benefits from improving cashflows and is becoming marginally more attractive. | NEUTRAL |
| High Yield Debt | Recent sell-offs have improved valuations modestly but overcrowding remains a risk in the US market when monetary policy is tightened. European debt remains supported by investors seeking yield. | NEUTRAL |
| Equities | ||
|---|---|---|
| US Equities | Valuations are stretched and margins are likely to compress due to the strong dollar’s effect on overseas earnings. Lower commodity prices are also weighing on key sectors. | LIGHT |
| European Equities | Corporate competitiveness is improving, and earnings should receive a lift from further euro depreciation, an improvement in domestic demand and lower energy costs. | HEAVY |
| Japanese Equities | Many structural reforms remain outstanding, but management focus on return on equity and a planned corporation tax cut are helpful. The Bank of Japan is taking action to reach the inflation target. | HEAVY |
| UK Equities | Economic data is a positive driver, but margins are coming under pressure from a mixture of currency and commodity price factors. Meanwhile, uncertainty surrounds a potential EU exit. | NEUTRAL |
| Developed Asian Equities | Trade is often a headwind, with Korea’s export share eroded by Japanese competition and a strong Australian dollar affecting terms of trade. China’s slowdown has harmed commodity producers. | NEUTRAL |
| Emerging Market Equities | Commodity-export-dependent markets have deteriorated while those with strong domestic fundamentals are improving. Policy, current account positions and central bank actions are other drivers of divergence. | NEUTRAL |
| Real estate | ||
|---|---|---|
| UK | The robust growth environment continues to bolster prices in the near term and yields remain attractive compared to other assets. This suggests reasonable returns over a three-year holding period. | HEAVY |
| European | Core markets continue to offer attractive relative value given the low interest rate environment and support from QE. Meanwhile, recovery plays are showing consistent capital value growth. | NEUTRAL |
| North American | Canadian property faces headwinds from significant office construction and consumers who are sensitive to interest rates. The US should benefit from continued economic growth but pricing is quite aggressive. | NEUTRAL |
| Asia Pacific | Attractive yield margin remains but markets are divergent. Returns are driven by rental and capital value growth in Japan but are limited to capital growth in Australia, Hong Kong and China. Emerging Asian markets are risky. | NEUTRAL |
| Other assets | ||
|---|---|---|
| Foreign Exchange | While the US dollar will benefit from upcoming monetary policy tightening, and continued QE in Japan and Europe, it has appreciated significantly in the last two years. | HEAVY $, LIGHT €, NEUTRAL £, ¥ |
| Global Commodities | Different drivers, such as US dollar appreciation, Chinese demand, Middle East tensions and climatic conditions, influence the outlook for different commodities. | NEUTRAL |
| Cash | ||
|---|---|---|
| Unconventional monetary policy is ending in the US and UK; some emerging markets are also tightening. QE in Europe and Japan will keep interest rates there low. | NEUTRAL | |
Key Issues
As 2015 has progressed, divergences in the global economy are becoming more apparent. Developed economies are leading the upturn, especially in the US but there is also a return to growth in Europe as financial conditions improve. Indeed, a tighter US labour market is encouraging the Federal Reserve to consider whether it could raise interest rates in coming months. This supports our stance in favour of the US dollar. Conversely, weakness in some major developing economies, such as China and Brazil, is bearing down on global commodity prices and therefore headline inflation.
We remain positive on the outlook for equity markets, although valuations mean we have modestly lowered risk levels in our multi-asset portfolios since the start of the year. Within equities, we favour Europe and Japan over the US, as they should benefit from a more favourable backdrop for corporate earnings at this phase of the cycle. Meanwhile, we are Neutral on the UK, developed Asian and emerging markets, as the latter generally underperform during periods of US dollar strength and commodity price weakness.
Within fixed income, we continue to look for yield opportunities. We have increased our position in corporate bonds and emerging market debt, although selective purchases are required given cashflow constraints. Expensive valuations mean we are Light or Neutral in most government bond markets. The exception is a Heavy position in European bonds, which benefit from low inflation and continued ECB QE. Meanwhile, we remain Heavy in real estate, where valuations encourage a rotation towards cheaper markets in order to take advantage of an attractive combination of growth prospects and yield.
Contact Your Local Independent Financial Adviser
Lucas Financial Consulting Ltd is based in Carrickmacross Co Monaghan. As we straddle four counties – Louth, Monaghan, Cavan and Meath we are ideally placed to become your new Local Independent Financial Adviser.
| Warning: These funds may be affected by changes in currency exchange rates. |
| Warning: Past performance is not a reliable guide to future performance. |
| Warning: The value of your investment may go down as well as up. |
| Warning: If you invest in these funds you may lose some or all the money you invest. |
| Warning: A deferral period may apply to withdrawals and/or switches from certain funds. Please refer to your product documentation for further details. |