Global fund manager Aberdeen Asset Management sees 2014 as a pivotal year for financial markets, with the US likely to lead stock markets amid expectations for a sustainable recovery in the world’s biggest economy.
While the Federal Reserve has started “tapering” its $85 billion-a-month bond-buying programme, interest rates are not expected to be raised for some time, signalling a temporary reprieve for bond markets set to suffer from higher borrowing costs.
US equities may still offer value, even following an almost tripling of the S&P500 from its lowest point during the 2008 global financial crisis, said Paul Atkinson, Aberdeen’s Philadelphia-based head of North American equities.
Atkinson was speaking at an Aberdeen Asset Management investor briefing entitled “Too Far, Too Fast?”
With corporate profits at record levels, investor interest has been focused so far on dividend-paying stocks and on energy and technology companies that have benefited from the shale gas boom and excitement surrounding social media, said Atkinson.
There are well-run businesses with solid balance sheets that have not participated to the same extent in the price surge and there is scope for these quality companies, operating in a range of industries, to achieve further operational efficiencies, he reckoned.
The open question this year is how the pace of Fed stimulus reduction will affect asset prices? Although there are signs of bubbles from luxury property to high-yield bonds, tapering is not the same as tightening, said Adam McCabe, Aberdeen’s Singapore-based deputy head of Asian fixed-income.
Aberdeen expects the Fed to raise interest rates only in mid-2015, said McCabe, but selected high-yield bonds may compensate investors for any widening of yield spreads. Meanwhile, there will likely be more volatility in currencies and fund flows between developed and emerging markets, he said.
A shift in capital flows will benefit equities in developed markets the most, particularly as business confidence returns and investment continues to rise, despite fiscal drag.
Even in Europe, sluggish growth amid an on-going debt crisis did not prevent an 18% rise of the Euro Stoxx 50 last year. Investors often overlook the extent to which European stocks are led by multinationals with global markets and well-protected franchises, said Jonathan Allison, a UK-based fund manager who covers the continent.
Paul Atkinson#: “US corporate balance sheets and cash generation have improved dramatically, financing progressive shareholder distribution policies. What we’re seeing on the ground too is a return in capital goods orders – and it’s that pick-up in the investment cycle that had been a concern until now.”
Adam McCabe: “If last year was about the great rotation from bonds to equities, this year is about where to find value. The influence of liquidity on sentiment shouldn’t be understated, and we’ve seen that in the way timing has been incredibly important to new capital raising in both equity and bond markets. Provided investors pay attention to fundamentals, there are still opportunities to be found.
Jonathan Allison* : “The best European companies offer brand, distribution and scale globally, creating barriers to entry that ensure margins can be kept. We see room for modest upside in earnings this year after a flat 2013, and that will support quality stocks after a period in which it was largely re-ratings driving market performance .”
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About Aberdeen Asset Management PLC
Aberdeen is the parent company of a global independent asset management group. Formed out of a management buy-out in Aberdeen, Scotland, in 1983, Aberdeen operates on-the-ground in over 23 countries across Europe, Asia and the Americas.
The Group is defined by its pure focus on asset management, including equities, fixed income, property and multi-asset portfolios. All investment solutions are driven by its commitment to straightforward, transparent investment approaches that stress intensive, first-hand research and a long-term view.
As at 30 November 2013, Aberdeen managed assets of $324 billion on behalf of institutional and private investors.
Further information about Aberdeen can be found at www.aberdeen-asset.com
# Paul Atkinson is head of the North American Equities team, advising the Aberdeen Global - American Opportunities Fund, the underlying fund of the Singapore-authorised Aberdeen American Opportunities Fund.
* Jonathan Allison is an investment manager of the Pan European Equities team, advising the Aberdeen Global - European Equity Fund, the underlying fund of the Singapore-authorised Aberdeen European Opportunities Fund.
The underlying funds are not authorised for sale to the public in Singapore.