We just spoke there about the moves that we've seen in Treasury markets, but
generally when you can get 5 percent on a table risk free at the moment, what
does that tell you about the outlook for equities?
Well, overall, it is not particularly attractive and it's confusing picture in
some ways because we as a house have been pretty optimistic about the global
economic outlook long expecting the US to avoid recession.
We don't have recessions now forecast even in Europe, which was really the
epicenter of the risks last year with rising gas prices.
But I would say two things. First of all, equity markets are really
pricing that outcome. Now, we don't think that pricing a
recession. And secondly, as you say, you're getting
quite a high return and competing assets with much less risk.
So overall, the biggest market in the world, we're looking at a flat return.
We've been preferring non U.S. markets for quite some time.
We still do. But even there, the absolute returns we
think will be relatively modest. Overall, the index level this year,
so modest returns overall where I am looking to to get the most alpha.
Well, I would say two things. Firstly, if you take all of the regions
globally, we've got the highest return forecast in Asia as partly evaluation
story in a recovery. The opening up in China.
And secondly, I think you really need to look within and beneath the equity index
level to really find better relative opportunities.
Now, that's been the story already for much of the last year where we found for
the first time in more than a decade, valuation really mattered.
Cheap things outperformed in the previous decade.
Generally more expensive things were outperforming and we think that will
continue. So we light pockets of value in Europe
where I Covid in particular, we've had a strong preference for banks, which have
been a disastrous performing area for more than a decade.
And over the last year have performed well.
We think there's more to go there. We like energy and commodity related
sectors as well. And we sort of balance that with a
preference for stable margin businesses across industries.
And that's true globally. When you talk about Europe outperforming
the US, what exactly do you see driving that?
I would say it's a couple of things. First of all, valuation.
The US equity market remains quite expensive.
Trading at over 18 times, that's quite a bit above its longer run average.
Most other equity markets trade below their longer run averages and that's
true in Europe as well. The most extreme cases in the UK, which
has been our preferred European market, was the best performing major index last
year. We still think there's a lot of upside.
That's partly because it's very cheap and partly also because it's got more
exposure to the things that no one really wanted in the last decade, which
was very dominated by large cap tech. But it does have a lot of exposure to
these things that are finally seeing quite strong fundamental earnings
growth, banks, healthcare resources. Yeah, that split between value versus
growth. Then talk specifically because is it
really right to look at it in those terms or how should people be really
approaching value as a sector? I think it's a good question because
there's a sort of tendency to look at everything in a very binary way.
And that's the approach that many people have taken really since the financial
crisis, because there was such an extreme difference between the growth
factor and the value factor. And as that's reversed, it's almost as
if people believe that you could see the same secular trends in the opposite
direction. I think it's going to be more eclectic.
We do like areas of value because we think as interest rate expectations
probably continue to rise or at least people start to question how long rates
are going to stay at these higher levels that will tend to benefit value areas of
the market that mean that cheap things have less to fall if there is a
correction. But we like to balance that against
pockets of growth that we don't think that expensive and where you put more
stable margin. So that's what really the market is
paying for. So things like healthcare would fit into
that many of the staples as well. If you look at Europe, the biggest
companies, the eleven biggest that we call the granola bars
have become very large in the index, 25 percent of the 600 biggest companies in
a similar way that the big tech stocks became very large in the US.
The difference, though, is that these super large European companies are still
seeing steep and high margins and that's maintaining their attraction is
relatively defensive growth areas of the market.
I would look at those as well.