For Liontrust head of multi-asset John Husselbee, the disparity of monetary policy across the globe is firmly dictating where he is placing his bets.
The veteran fund manager, who runs 27 discretionary model port-folios alongside three third-party Oeics, is, like most of his rivals, overweight equities and underweight bonds and in regard to the former, Japan and Europe are the main targets.
Looking to his two key overweight positions across his suite of funds, Husselbee says the US and the UK are set to rein in their respective prolonged periods of ultra-loose monetary policy. Japan, however, is in the early stages of its latest stimulus while Europe is just about to get started on a heavy quantitative easing programme.
He says: “Look at the US, the UK and Japan too, in terms of their respective experiences of QE. The move has certainly inflated asset prices. This is the year the divergence between central banks’ policy widens further and the opportunities for fund managers widen too.
While European stocks have enj-oyed their own post-crisis – albeit volatile – rally, Husselbee says the region is still under-owned and is optimistic the European Central Bank’s €60bn-a-month bond-buying programme can help reverse that trend. “Europe contains some excellent and well-run companies. It has significantly underperformed the US equity market in the last seven years.”
When it comes to asset allocation, Husselbee rates regions and asset classes on a one to five score card and Europe and Japan currently come in at a solid four.
The result of December’s snap election in Japan, which was widely viewed as a test of support for Prime Minister Shinzo Abe’s economic policy, saw the ruling coalition deliver a two-thirds majority. The result served to galvanise Husselbee’e conviction towards the country, which he sees as enjoying the “triple tailwind of low valuations, abundant liquidity and economic reform”.
He says: “The parliamentary elections showed the level of support for the longer term reform plans and Japan, like Europe, looks very cheap.
“In addition, a lot of Asian exporters which Japan competes with have their currencies pegged to the US dollar, which has been detrimental to them. On the other hand, QE in Japan has managed to weaken the yen versus the dollar and that gap between them has widened further.”
The more overbought markets of the US and the UK each score just two out of five on Husselbee’s system.
The situations for both are similar in many ways. While they are still on emergency interest rate levels, their economies are much further down the track in term of economic recovery.
“In the US there has been a significant re-rating and equities look expensive. We do not see the potential for further significant multiple expansion there. However, we do recognise the strength of its economy and equities may be able to generate moderate returns simply through the delivery of good earnings growth even without any multiple expansion. The UK looks expensive too, relative to other parts of the world, and it has the added political uncertainty of a general election.”
Husselbee says while some emerging markets had a rough time last year, China’s slowdown was no worse than feared. “Global emerging markets continue to be driven in the main by China, which is rebalancing its economy, which in turn is slowing its pace of economic growth.”
The asset class represents one of his more bullish calls – it is four out of five – but his focus is very much on Asia over Eastern Europe and Latin America.
“Their fortunes are very different. Look at the contrast between India and Brazil.”
Like many of his peers, Husselbee is not seeing too much appeal emanating from the fixed income space but still feels the need to hold a fair chunk. However, his preference is for credit and high yield.
“We have been negative on government bonds for some time. We were surprised and disappointed by government bonds in that yields did not rise in 2014.
“Look at 10-year UK gilts falling to under 1.4 per cent this year.
“We do not think economic conditions will deteriorate as far as bond valuations currently suggest but we still think monetary policy will need to remain accommodative in the short to medium term.”