As summer fades and an autumnal chill enters the air in the northern hemisphere, the developing world appears to be emerging from the long economic winter that followed the global financial crisis of 2008. In this viewpoint, William Davies surveys the global economy and highlights those stocks and sectors that Threadneedle favours:
While the US economic recovery has been a feature of financial markets this year, it is only recently that signs of improvement have become established in other developing economies.
Europe, over the worst?
Our base case for Europe remains a slow and protracted economic recovery. However, we believe the worst is now over and are taking advantage of relatively attractive valuations. We continue to avoid stocks in the periphery, and heavily indebted businesses, which are at risk should negative growth shocks emerge.
We have recently taken positions in the Swiss bank UBS and Continental, a leading German autoparts supplier.
Weaker yen boosting Japanese profits
We are optimistic about the efforts of Japan's Prime Minister, Shinzo Abe, to revive the economy. His policies, known as ‘Abenomics’, include boosting the supply of money in the economy and increasing government spending. Abenomics has already had a dramatic impact, sending the stockmarket soaring, whilst Japanese firms have reported a surge in profits largely thanks to the weakening yen.
Critically, Japanese consumer prices have started to rise, a sign that the policies aimed at ending deflation are yielding results. Consumer price inflation rose to an annual rate of 0.7% cent in July, its highest level in almost five years.
Tapering talk signals the beginning of the end of the financial crisis
Our longstanding overweight positioning in the US has been rewarded in 2013. The housing led-economic recovery is now much more firmly established than in the rest of the world.
Our positioning favours cyclical sectors, in particular, companies exposed to the shale energy revolution and to rising consumer spending. We see potential in beneficiaries of the growing e-commerce sector, such as eBay, and in companies providing non-cash payment solutions including credit card companies such as American Express, Mastercard and Discover.
Stock-picking offers value in emerging markets
Emerging markets have come under considerable pressure recently following the change in direction of US monetary policy. Those emerging economies reliant on foreign capital inflows to fund their current-account deficits have been particularly affected.
Valuations appear increasingly attractive, and emerging economies in general are much better placed than they were during earlier cycles of monetary tightening, such as in 1994. Although we remain concerned about countries with large current-account deficits, such as India and Indonesia, we are more confident in those economies that are in a balanced or surplus current-account position. We believe that the differentiation in performance between countries/sectors in emerging markets will continue and prefer export-oriented economies such as Thailand and Mexico, at this stage in the cycle, as they should benefit from the consumer recovery in the developed world.
We are concerned that any deterioration in the eurozone could once again harm global investor sentiment. There is a suspicion that potential problems in the eurozone may have been deferred until after the general election in Germany in September. Another concern is that a slowdown in the emerging economies impacts companies such as Nestle, which have been profiting from the rise of the emerging consumer.
Overall, we anticipate that global equities will encounter volatility in the final quarter of the year as investors weigh the likelihood and timing of QE tapering. However, we remain positive on the outlook for global equities given the strong underlying fundamentals in the form of increasing economic growth in the developed world. Moreover, we believe that concern over the impact of tapering may have been exaggerated, believing that it signals a return to normal conditions.