US equities split asset allocation panellists

An intriguing division of opinion has emerged over US equities. Chris Wyllie of Iveagh Private Investment House and Aberdeen Asset Management's Michael Turner remain underweight here. In contrast, Thames River's Rob Burdett has upped his score from six to seven.

"In the short term and relative to other markets, I think it is going to offer the best earnings and growth in the economy," he says. "Valuations are high and that is a worry, but the entrepreneurial spirit seems to be dominating."

To find out why the asset allocation panel is unanimous that the most likely way is up for emerging markets, read:Long-term value emerges in BRIC markets.

Keith Wade at Schroders does not find the US market "terribly expensive", he says. "It may look fully valued compared with other markets, and that is driving a rotation of funds out of the US and into Europe."

The Schroders stance for some months has therefore been to remain overweight in the US, but to reduce that overweight position to fund an overweight one in Europe. "I still think there are quite a few positive themes in the US," he says.

Quantitative easing

"The US is on the path to exit from quantitative easing, while the European Central Bank is considering quantitative easing for the first time. The US market is now driven by real growth, whereas Europe is driven by liquidity."

Robert Talbut at Royal London has raised his score for the US from five to six, because he feels we are "still in a decent environment for equities".

"Some of the complacent froth has been blown off markets in the past three months," he says. "There are rising concerns about China, with the Ukraine crisis thrown in for good measure. However, I do not think the underlying story has changed: this year should be a year of reasonable economic activity, and while equities don't look cheap, they probably constitute better value than most other asset classes."

He agrees the US market may be the most expensive. But he adds: "There is reassurance in buying what is relatively expensive and may seem like a safe haven."

Turner at Aberdeen, however, finds it easy to justify his underweight position in the US. He claims 60% of corporate earnings growth there last year came from share buybacks. He notes that the differential between 10-year bond yields in Spain, a triple B minus borrower, compared with those in the US, a double A-plus borrower, have narrowed to just 60 basis points. "That is not much, given the level of credit risk. To us it is a clear warning of higher US interest rates," he says.

Ridiculous valuations

Turner frets too about "ridiculous valuations" on some high-tech and biotech stocks, and warns that margin trading on the New York exchange is back to 2007 levels. "The US markets need evidence of corporate earnings growth," he says.

The crunch may come in October, when panellists such as Wade are convinced the US will have ended QE. By then, according to Wyllie, markets will think about the rise in US interest rates they currently expect in the first half of 2015. In the absence of earnings growth, fear of a rate rise could trigger a market correction. Wyllie thinks that would be quite healthy. But he warns: "If US equities start to fall, the chances are that all other equity markets will go down."

The timing of any interest rate rises will be key - and here there is disagreement. Keith Wade thinks it won't happen in the US until the autumn of 2015. In the UK, he does not see Bank of England governor Mark Carney raising rates until 2016.

Burdett is non-committal on interest rates, but he went "completely underweight" in equities in January because he thought the market was overdue for its correction. The correction was only modest and he has returned to a more neutral stance. Out of 11 asset categories, he now scores a five in more than half, as he has narrowed his score range across the spectrum.

"There are reasons to be careful now," he says. "We have gone underweight in bonds to help fund an each-way bet, with increased exposure to absolute return funds. They can profit from falling as well as rising markets, and offer the 6-8% returns we expect for 2014 across the board."

The five panellists

Chris Wyllie is chief investment officer at Iveagh Private Investment House. He is also the head of portfolio management at Iveagh Wealth Fund, with £250 million under management.

Rob Burdett is co-head of multi-manager funds at Thames River Capital, with £1.5 billion under management. It is a largely autonomous business within the F&C group, managing funds of more than £100 billion.

Michael Turner is head of global strategy and asset allocation at Aberdeen Asset Management, with £177 billion under management.

Robert Talbut is chief investment officer at Royal London Asset Management, with more than £40 billion of assets.

Keith Wade is chief economist and strategist at Schroders, which has £203 billion of assets under management.

Areas of broad agreement

A consensus is developing among the panellists on some market categories. All five are now overweight European (ex-UK) equities - scoring either a six or a seven. The contrast with the US is clear. Whereas the US authorities appear determined to have done with QE by the autumn, the European Central Bank looks poised to introduce it for the first time to head off the risk of the eurozone being caught in the kind of deflationary trap that Japan has suffered.

There is growing enthusiasm too for the commercial property sector. Robert Talbut has raised his score from six to eight, while Keith Wade is getting "positive" messages from his property experts. Even Rob Burdett, who maintains a neutral score here, is enthusiastic about the recently launched Custodian Reit, with its spread of 48 commercial properties across the UK. "Expected overall returns of 6 to 8% this year are right where commercial property should be," he says.

Schroders' Wade is encouraged on the commercial property front by signs of better health in the UK banking system. "A lot of bank property portfolios are being repackaged and sold at discounts to private equity groups," he says. "A year of decent growth in rental income is in prospect."

In the wake of the recent Budget, Michael Turner says commercial property investment vehicles become increasingly attractive "if you don't have to buy an annuity".

"There may be less scope for capital appreciation, but you can get the growing income," he adds. "The search for decent income still goes on with the same intensity in this era of low interest rates."

"We are seeing signs of rental growth for the first time in some years and we are getting mild capital appreciation," says Talbut, the most bullish of the panellists on property. "I believe UK commercial property will do very well over the next 18 months."