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Seeking growth

Aram Compton of Sarasin said the company sees value in tech companies, taking a long-term approach. “Companies such as Netflix have extensive runways for growth and we expect them to return capital to shareholders,” he said.

The Multi-Asset team at Schroders currently has a bearish outlook on most sectors based on valuations. They consequently have a low net risk position in their funds. John Stopford of Investec sees reasonable value in Europe and Japan. “It’s fashionable to be cautious,” he said. “As the cycle matures it’s important to be very selective about what you own. I’m not a fan of US treasuries. There are other government bond markets, such as New Zealand, that could lead to capital gains. And we’re cautious on the rand.”

Impact of QE

John Stopford agreed that QE has unintended consequences. “We’re getting into increasingly experimental monetary policy, which is worrying,” he said. “Global markets are pricing in a high probability of a recession in the next 6 – 12 months.

He believes QE has served its purpose and questions whether it’s still needed in the US with the current improved employment rate. “It will be difficult to make a comeback from negative interest rates,” he said.

Marcus Brookes echoed this, stating that Schroders is concerned about global markets.

Interest rates

“We can’t ignore the government bond sector,” said Aram Compton. “We like infrastructure trusts for their inflation-linked cashflow streams.”

Schroders is bearish on the bond market, and is also critical of negative interest rates. “Government bonds are far too expensive because of the super low interest rates and low growth expectations,” said Marcus Brookes.

Investec’s John Stopford said high yield bonds provide an alternative to equity. He likes Australia and New Zealand where it’s possible to still get positive yields. He cited Japanese government bonds as the only government bonds that have not had a negative rate over the last 20 years.

He sees equities as roughly fairly valued. “On a relative basis, we’re earning decent yields on equities (dividend growth and earnings growth). It makes sense to have a reasonable amount of equities,” he said.

“Within growth assets, equities look attractive. Within high yield it becomes much more about sector and individual yield. We currently have 28% in equities and 18% in high yield in the income sector. We’re more skewed towards names we like.

Schroders has zero exposure to government bonds but has started taking positions in high yield. “Our bond exposure has been low for 18 months now,” said Marcus Brookes.

Sarasin has recently started increasing its high yield exposure, but the level is still low.

Emerging versus developed markets

“Tactically, we take the view that emerging markets are oversold,” said John Stopford. “We can find defensive companies – ones that are not volatile – with good dividend potential, in the developing world.

“In fixed income, Mexican bonds are pricing in increases we’re not likely to see. The same applies in SA and Indonesia. The rand and the Mexican peso are both oversold.”

Schroders is relatively cautious on emerging market economies, but less so on their equities. “Emerging markets did relatively well in the sell-off earlier this year,” said Marcus Brookes.

He sees European and Japanese equities as relatively, but not absolutely, cheap.

“We have no property and no infrastructure exposure,” he said. “We’re far more favourable to equities than other areas right now.”

Sarasin’s Aram Compton said the company wants exposure to the growing middle-class in the emerging market economies. “As an example, Colgate gets 50% of its earnings from emerging markets,” he said. “That’s better than buying a pure emerging market stock. We’re skewed towards commodity market consumers in the South-East Asian countries.”

Warning signs that equity exposure should be reduced

Responding to a question around possible warning signs to look out for, that indicate that equity exposure should be reduced, Investec’s John Stopford said that at the core of his equity market view is the view that a recession is not imminent.

Marcus Brookes confirmed Schroders is underweight equities, believing that “we are probably already in a bear market.” He stated that macro-economic data won’t be the biggest signal of a recession. It will be when earnings and profits no longer support the valuations. “In the 2007/2008 market downturn, it took about six or seven months before people realised that the peak had passed,” he said.

Aram Compton believes we’re in an environment where we no longer see huge booms or busts as in the early 2000s. “Growth expectations are much lower now, as we ‘muddle along’,” he said. He agreed with Schroders’ view that valuations are the main signal to watch.

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