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Bull and Bear
Q1 2012
UK Equities
Positives
- Valuations remain very attractive, especially among selected domestically-focused stocks
- UK companies are well exposed to fast-growing international markets
- The corporate sector in general benefits from very healthy balance sheets
Negatives
- There is little prospect of real wage growth to support consumption
- Fiscal consolidation is weighing on growth and boosting unemployment
- Zero growth expected in 2012
Summary
The market is cheap relative to history and arguably already reflects a significant slowing in earnings momentum in 2012
Position = Overweight
Tags: uk, equities
US Equities
Positives
- There are many attractive stocks to choose from and valuations look very attractive relative to history
- Corporate earnings, cash flows and balance sheets are strong
- Increased energy self-reliance and an industrial renaissance are key long-term drivers
Negatives
- The eurozone crisis continues to pose a threat
- The process of deleveraging will weigh on growth
- Unemployment remains high
Summary
The corporate sector is in good health and the economy appears to be improving.
Position = Overweight
Tags: us, equities
European Equities
Positives
- Share valuations are very appealing
- A weaker euro benefits exporters
- The ECB's 3-year LTRO has reduced the risk of bank collapses
Negatives
- Sovereign debt problems in peripheral markets remain a major concern
- Austerity measures hinder recovery
- Eurozone GDP is expected to contract in 2012
Summary
European markets are vulnerable to ongoing sovereign-debt risks, but stocks look excellent value.
Position = Underweight
Tags: european, equities
Japanese Equities
Positives
- Equities are very good value
- Corporate profits should rebound as the impact of the earthquake and tsunami fade
- China soft landing and gentle US recovery should support exports
Negatives
- Levels of government debt remain very high
- The eurozone crisis remains a threat
- Power shortages may develop over the summer months due to the shutdown of nuclear facilities
Summary
Japanese equities are cheap relative to history while the weaker yen should support profits growth
Position = Modest overweight
Tags: japan, equities
Emerging Equities
Positives
- Falling inflation gives scope for further monetary easing
- Robust fiscal position allows action to support growth
- Strong domestic demand can offset weaker global growth
Negatives
- Emerging markets remain susceptible to global risk aversion and fund outflows in times of volatility
- Risk of a hard landing in China
- Persistently high oil and any increasing food prices could start to undermine domestic consumption
Summary
Valuations remain supportive and already relfect a great deal of bad news.
Position = Modest overweight
Tags: emerging, equities
Asia Pacific Equities
Positives
- Domestic consumer demand is becoming an increasingly important element of growth, resulting in more balanced economies
- The worst of the global slowdown has already been priced into earnings expectations
- Banking systems in the region are in reasonably good shape
Negatives
- These markets are vulnerable to setbacks in risk appetite
- Europe and macro policy in China will remain the key factors influencing stock markets
- A hard landing in China remains a threat
Summary
Falling inflation opens the door for further monetary easing that could offset the impact of weaker global growth.
Position = Overweight
Tags: asia, pacific, equities
Property
Positives
- There is still strong demand for property exhibiting 'gilt-like' long-let characteristics
- Future property returns will be mainly driven by rental income
- The central London office market remains strong
Negatives
- Capital growth is now a negative driver for the market
- Outside Central London, rents are unlikely to increase, given the uncertain economic backdrop
- If banks pro-actively unwind non-performing loan structures, this could exacerbate any correction in capital values in 2012
Summary
Property is seeing a return to a more stable market dynamic in which income forms the core component of total returns.
Position = Underweight
Tags: property
Government Bonds
Positives
- Government bonds benefit at times of risk aversion due to their safe-haven appeal
- Pension fund demand continues to be a long-term support
- Interest-rate increases seem very unlikely in the developed world
Negatives
- Yields are unattractive
- The failure of LTRO to deliver any lasting benefit
- Government bonds are vulnerable to any positive economic surprises
Summary
Government bonds offer poor value, but this is unlikely to change given the Federal Reserve's commitment to maintaining low yields.
Position = Underweight
Tags: government, bonds
Emerging Market Bonds
Positives
- The overall credit quality of the asset class remains good
- Spreads remain wide, creating a buying opportunity
- The experience of 2011 will likely prompt more asset re-allocation from developed market bonds to EM bonds
Negatives
- EM bonds are prone to setbacks when risk aversion rises
- Export growth is likely to weaken in 2012
- Local currencies may be vulnerable to short-term volatility
Summary
Emergng market fundamentals are geneally good, with low levels of debt and record high reserve cushions.
Position = Overweight
Tags: emerging, market, bonds
Corporate Bonds
Positives
- Corporates have very high levels of cash
- Banks are unlikely to face solvency problems - the ECB's LTRO provides enough cash to cover maturing bonds over the next three years
- The search for yield will lead to a reallocation to corporates
Negatives
- Investment-grade securities in peripheral Europe suffer from exposure to their countries' ongoing sovereign debt problems
- Corporate bonds tend to underperform government bonds in times of risk aversion
- Earnings could prove vulnerable to tougher economic conditions
Summary
Credit markets benefit from good company results and valuations that are attractive versus government bonds.
Position = Overweight
Tags: corporate, bond
Important information
The research and analysis included in this report has been produced by Threadneedle Asset Management Limited (an associate company regulated by the FSA) for its own investment management activities; it might have been acted upon prior to publication and is made available here only incidentally. In some instances the information contained in this publication, other than statements of facts, was obtained from external sources believed to be reliable but its accuracy or completeness cannot be guaranteed. Any opinions expressed are as at the date of publication but are subject to change without notice.
Past performance is not a guide to future returns. The value of investments and the income from them is not guaranteed and may fluctuate and the investor may not get back the original investment. Changes in exchange rates may also cause the value of underlying investments to fall as well as rise. The naming of any specific shares should not be taken as a recommendation to deal and anyone considering purchasing the securities mentioned should consult a stockbroker or financial adviser. Issued by Threadneedle Asset Management Limited (TAML). Authorised and regulated by the Financial Services Authority. Registered in England and Wales. 60 St. Mary Axe, London, EC3A 8JQ. Registered No. 573204. Threadneedle is a brand name, and both the Threadneedle name and logo are trademarks or registered trademarks of the Threadneedle group of companies. threadneedle.com