News

It is fair to say that equity performance year to date has been subdued and that the surprise has been the strength in bonds. Poor weather in the US has affected economic releases, giving rise to concerns over growth and earnings downgrades. Worries about slower Chinese growth and rising debt, have spread further unease for equities over 2014.

In April, equity markets began to gently recover after their January fall and February to March hiccups, and May is showing further strength on the back of earnings reports and economic releases.We will be examining earnings releases further for evidence that prospects for companies are improving, as we believe they should. We expect earnings forecasts to stabilise, (downgrades have slowed), and then improve as we go through the year.

The UK has experienced the greatest improvement in GDP forecasts and valuations are reasonable so we remain positive, with an economically sensitive, cyclical, bias. In Europe we also remain positive about recovery, we expect the Euro to begin to weaken but are sceptical that the ECB will engage in outright quantitative easing (QE). In Asia valuations are reasonable, but sentiment has been affected by China – we expect this to improve as we travel through 2014.

The Japanese stock market has weakened most, although this really happened in January and since mid-March has tracked global equities more closely. We continue to maintain a positive stance on the ultimate success of Abenomics, although markets may be disappointed if QE is not stepped up further. Valuations in the US continue to look relatively expensive; we are unlikely to add here although we may build cyclical exposure at the expense of more defensive areas.

Overall momentum in markets remains positive despite the stuttering start to the year. Improving growth should feed through to better profits and we expect this to result in a further improvement in markets. We continue to favour corporate bonds over government bonds as yield spreads remain higher than historic lows.