Towards the end of January this year, we had warned that there were “warnings” in equity markets and that investors should “hold tight.” We expected a correction but not quite so immediately. We had also expected it to be something in the region of 5% to 10%. In reality, it turned out to be a bit more and a very nasty time to be holding equities. As we commented last week, things have been rather better more recently and most equity markets have picked up and are close to where they were at the beginning of the year. We say most, because there are some exceptions and, unfortunately, two of those are areas where we are overweight – emerging markets and Japan.
Both emerging market and Japanese equities have struggled to recover from their losses. For the time being, we intend to retain our overweight stance in both asset classes. Emerging markets are suffering from headwinds including the US dollar, worries over trade wars and the Chinese economy. However, we still feel that they offer better value than many developed markets and that many of these worries are already priced in. In the case of Japan, we do acknowledge that the recent period of solid growth may falter. Economists are blaming this on many things ranging from weaker demand for exports to poor private consumption. Whatever the reason is, it does mark the end of a robust period. The question is whether it is a blip or something more sustained? The consensus is that it is the former and we are happy to accept that, for now.
So we move into summer in rather better shape than we moved into spring. There are, undoubtedly, worries out there. Nobody is going to pretend that the arguments between Iran and the US can be ignored – nor the tensions with Israel too. As things stand, though, it is back to geo-politics as the biggest headwinds. The tailwinds are solid – if unspectacular – economic news and good earnings seasons in both Europe and the US. We have used the recovery to re-adjust our own positioning – including selling into strength in some areas so as to further reduce our exposure to riskier assets. This simply reflects our view that, no matter how relaxed things are now, potential equity returns are likely to be lower in coming months.
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