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Bambos Hambi: My Three Big Calls

Earnings and geopolitical risks are ones to watch

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Overweight European equities

Europe is not without its challenges. However, a number of factors lead us to believe the situation in Europe is broadly improving and justify our decision to move from a neutral to overweight position. 

Overweight European equities

First, corporate earnings expectations are more realistic, with consensus forecasts drifting from around 14 per cent at the start of the year to around 8 per cent at present.

Meanwhile, the targeted longer-term refinancing operation scheme announced by the European Central Bank in June should boost banks’ earnings and generally encourage lending. 

The region should also benefit from increased global capital expenditure and merger
and acquisition activity.

US companies currently have an estimated $1trn (£600bn) in offshore cash balances they are unlikely to repatriate for tax reasons and European companies may become an outlet for this money. Finally, recent euro weakness can be seen as a positive in that it improves corporate competitiveness.

Overweight emerging market debt

With the tapering-induced volatility of 2013 and early 2014 seemingly behind it, emerging market debt now appears more attractive, especially as some of the key risks look to have diminished. 

As a result, the available yield on the asset class stacks up well relative to investment-grade
and high-yield bonds, both of which have experienced significant credit spread tightening in the
year to date. 

We are also aware this position will act as a counterweight to our ongoing underweight exposure to emerging market equities, a position that would come under pressure should sentiment towards the asset class improve.

Increasing our exposure to beta

Where possible, we have reallocated from cash or credit into equities, increasing the overall beta of the MyFolio portfolios. This reflects our view the current environment is a favourable one for risk assets.

With inflation still muted across most developed markets, central banks are under little pressure to tighten monetary policy quickly.

However, the strong growth seen in the UK and US means the Bank of England and Federal Reserve are likely to be the first to act.

Central bank policy in both Japan and Europe remains unambiguously committed to stimulating growth and this support is likely to remain in place for at least the next year.

We will carefully monitor this position for any increase in geopolitical risk from Russia or the Middle East or signs of earnings disappointments, both of which could cause valuations to start to look stretched

Bambos Hambi is head of fund of funds management at Standard Life Investments

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