Valuation normalisation, slow economic growth and the importance of stock selection are some of the themes currently shaping the investment landscape for 014. Some of Natixis Global Asset Management's equity managers discuss the opportunities, potential issues and current trends in US, global and sustainable equity markets.
“In the United States, as well as in global markets and in socially responsible and sustainable investments, our experts see interesting investment opportunities and prospects for 2014” – says Antonio Bottillo, Managing Director for Italy of Natixis Global AM. “Even before the yield, however, it is necessary to ask ourselves how much risk we are willing to accept and how we can insert these ideas into an articulated portfolio construction that allows us to achieve our objectives. This is why it is necessary to adopt a different approach to investments that knows how to think in terms of financial planning and in a long-term perspective”.
Chris Wallis, Chief Executive Officer
Vaughan Nelson Investment Management
From a fundamental point of view, Wallis believes that for US stock markets, 2014 will be similar to 2013, and therefore characterized by very slow growth, no particular trends but no penalizing elements. However, Wallis believes stock prices will continue to be supported by quantitative easing. “Despite the Fed's claims that it will begin tapering, continued high liquidity will likely lead to a positive backdrop for equities, especially US equities,” Wallis said.
Wallis anticipates that some areas of the market could come under pressure, but believes active management can deliver strong results. “We believe equity indices can remain under pressure for several years, but there are still huge opportunities in relation to individual stocks,” she says. Wallis points out that the biggest challenge equity investors will likely face will likely be pressure on corporate margins. Much of the earnings growth of US companies is attributable to cost reductions in recent years, as well as unusually low interest rates and tax rates.
“This situation will become problematic for some companies as the Fed normalizes monetary policy. However, it will take some time before this criticality materialises. There is no reason why investors should expect interest rates to rise suddenly. Quite frankly, the Treasury budget, as well as the broader US economy, are currently unable to handle that,” Wallis said. He also argues that "companies whose profits have increased through the implementation of specific operations or better management of the balance sheet, will continue to do very well in the current environment".
What will the looming interest rate hike mean for equity investors?
While seemingly illogical, Wallis believes that rising interest rates will mean more opportunities in the future, albeit also more volatility. “We welcome market corrections as they give us an opportunity to redeploy capital. Rising interest rates will cause difficulties for some sectors, including utilities, but in general it will result in an increase in the cost of capital, so companies with lower rates of return will find greater obstacles in raising capital to implement their business strategies. That said, this factor is simply going to create an extra edge in the market and therefore more opportunities for more selective stock pickers,” says Wallis.
Wallis sees the most attractive alpha-generation opportunities in financials, industrials, the retail and technology sectors. “The real opportunities won't be in one sector, but in specific companies,” Wallis believes. The trend towards selectivity is also common to other asset classes and market capitalisations. “Large-cap companies are no more attractive than small-cap companies, which in turn are no more attractive than mid-cap ones. You will really need to consider the specifics of individual stocks,” says Wallis.
The trend Wallis pays most attention to is the slow recovery of the US economy. He recalls how this cycle is very different from past recoveries as a normal cyclical recovery has not yet occurred in the durable goods sectors such as homes and appliances. The automotive and non-residential construction sectors are recovering. But there are other critical issues, such as the formation of new families, considerably hampered by the financial crisis.
“I think we're going to hit an inflection point in the next couple of years where they need to increase new home sales and construction from half a million units a year to one million or nearly 1.5 million new homes to keep up with creation. of new households,” says Wallis. When that happens, Wallis believes US economic growth, employment and interest rates could start to rise.
Jens Peers, Chief Investment Officer
mirova
Peers has a positive view for sustainable equity investing in the new year. One of the reasons for this point of view is the macroeconomic context, which seems very favorable. “The scenario may not look optimal in the near term as unemployment is still very high, but we expect positive, albeit moderate, economic growth globally,” Peers said.
Furthermore, central banks are still accommodative, which means that they will likely continue to introduce innovative and localized solutions to support a still weak economy. Third, Peers believes valuations are still very attractive. “That combination creates a positive outlook which, in terms of style, should be particularly supportive for small-cap stocks.” Peers notes that lower quality and value stocks have recently begun to outperform and believes this trend will continue into early 2014 and reverse later in the year.
The finance and energy efficiency sectors are particularly promising according to Peers. “It is obvious that, given the scarcity of capital available for governments to invest in the real economy, banks will be called upon to play a more important role. We really like sustainably funded banks. This means attracting deposits and then reinvesting the money in the real economy through loans and investments for small and medium-sized enterprises,” says Peers.
Energy efficiency is another topic that Mirova finds particularly interesting. Peers explains that more energy is needed to kickstart the economic growth the world needs. “Given our dependence on fossil fuels, which are not unlimited by nature, it is clear that we need to invest in energy efficiency. Businesses are also under increased pressure to reduce operating costs, and investing in energy efficiency typically involves a pay-back period of around two years. This can have a very positive effect on operating costs,” says Peers.
From a valuation perspective, Peers believes share prices are attractive globally. “As valuations are more in line with historical averages, we think equity returns will be driven more by earnings growth rather than a revaluation in equities generally.” In terms of geographies, Peers points out that the US still prices slightly "premium" to European markets and does not think this gap will close. Yield growth in 2014 will be marginally higher in Europe than in the US. As a result, Peers expects European stocks to perform slightly better than US stocks.
Sustainable investment opportunity for 2014
In the energy sector, particularly solar energy, which has suffered quite a bit over the last three years, Peers believes the fundamentals are currently very attractive. “In the sector in question, the price of solar panels has decreased considerably, reaching levels in many areas of the world that make them even competitive with the prices of electricity itself. This is driving a rapid recovery in demand, especially in the US,” says Peers. In China, the recent introduction of competitive solar electricity prices is very favorable for the growth of solar generation.
One of the possibly destabilizing factors for Mirova's investment strategy for 2014, in absolute terms, could be any slowdown in China's economic growth as it transitions from an infrastructure-led industrial economy to a more consumption-based economy.
