“Last year, working out themes for this year was quite tough,” Hawker told Expert Investor Europe’s sister publication Fund Selector Asia.
“We had to think hard, nothing was glaring, which suggests there are not many anti- consensus aspects when looking at the markets.”
Asia fixed income
In fixed income, he noted a general tendency among institutional and wealth management clients who are moving away from benchmark strategies to more absolute return. This is a global trend confirmed by data collected by EIE with fund selectors across Europe. According to these data, about half of Europe’s fund selectors want to increase their allocation to absolute return products in the next 12 months.
The much anticipated US interest rate hike, expected this year, should not be a major concern, said Hawker. “Raising rates from zero to 50 basis points is not a reason to panic, as that is already priced in the market.
“By the end of next year, rates should be around 1.5%. If it follows that pattern, there shouldn’t be major issues.”
He sees US dollar strength continuing in 2015 and said the currency has a potential to be a safehaven. “If Europe deteriorates further, the US dollar and [dollar-denominated] assets and equities will be a beneficiary as long as US earnings growth doesn’t disappoint.”
The only asset class that comes close to a strong call is developed sovereign fixed income, where Mercer has a negative view.
Within fixed income, Asian bonds were an exception.
“Asian fixed income is one of the least bad areas to be in fixed income. Clients are taking exposure mainly in hard currency, but we’re suggesting a spread across both hard and local.”
European fund selectors seem to agree to some extent, as Pan-European appetite for especially emerging market corporate bonds is markedly higher than for all other bonds. Still, it is nowhere near highs seen in the beginning of 2013.
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Tilt toward Asia
Falling commodity prices have negative or positive effects on emerging markets, depending on whether a country is more of a producer or consumer.
Hawker said clients have been on the fence when deciding whether to allocate to emerging markets or to Asia, and falling commodity prices creates a sharper differentiation.
Asia is largely an oil consumer and emerging markets ex-Asia are home to large oil producers.
“[Falling prices] have a reinforcing effect that investors should be more Asia focused.
“There’s more differentiation created in the EM space as well. Large issuers of EM debt tend to be commodity producers rather than consumers.”
On the equities side, institutional and wealth manager bias has shifted more toward Asia instead of a general EM bias, he added.
China and India
Mercer is positive on Chinese equities, “tempered by uncertainty”.
“There is a potential for policy mistakes while the government manages the growth slowdown, though it’s not a central risk.”
As economic growth slows, China could see an increase in defaults, he added.
“Coming from a low base, a few defaults are inevitable. The question is, how mamny will there be and how are they handled?”
On India, where general investor sentiment is running high, Mercer is “mildly positive”.
“India has had a lot of disappointments over a long period of time. Whether [Prime Minster Narendra] Modi gets everything working efficiently remains to be seen, but a lot of the news is already reflected in prices. The upside aspect may not be as strong as what people are looking for.
“We are realistic versus optimistic. It’s hard to say that in India this time x will happen when it hasn’t happened in the past.”
Risk watching
Hawker also cited several risks that could flare up and cause Mercer re-examine its investment views: A US earnings surprise to the downside; deflation aspects coming through strong in Europe; core inflation in the US increasing, pressuring the Fed to raise interest rates faster than anticipated; an escalation of the conflict in Ukraine.
“Europe’s GDP growth could surprise to the upside, but it could also surprise to the downside,” he added. “We are watching any deviations from what we are expecting.”
