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Multi-managers stand by developed markets

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Any volatility brought on by the end of easy money looks unlikely to knock multi-managers’ renewed faith in developed markets and should merely serve as an opportunity to top-up their bets.

In contrast, emerging markets have fallen down the investment priority list given their underperformance over the past two years, as many of the factors which made them a compelling story, including weak currencies and cheaper labour costs, have been eroded.

Aviva Investors’ head of multi-asset retail funds Peter Fitzgerald does not anticipate the current investment environment in emerging markets will alter any time in the near future. He says: “This trend in emerging markets is likely to continue for the next few years.

“While there is always a danger the end of quantitative easing could derail the rally witnessed in developed markets, I expect any correction to be reasonably limited.”

The spate of good news coming out of the developed world in contrast to the relative uncertainty clouding emerging markets has turned many a multi-manager’s head.

While mature markets have endured their fair share of volatility in 2013, not least as a result of the prospect of the end of QE, they have still delivered. Since the start of the year to the 4 September, the S&P 500 and Japan’s Nikkei 225 are ahead by 22 per cent, Europe’s STOXX 600 has firmed 16 per cent and the UK’s blue-chip benchmark, the FTSE 100 has achieved 13 per cent. But the MSCI Emerging Markets index, is down by 6 per cent since the start of 2013.

An improved housing market as well as better job numbers in both the US and UK have more than helped to elevated the mood. Recent weeks have also unveiled a spate of better data where both the UK and the US have seen their respective second quarter GDP figures revised upwards.

The former saw its economy expand by 2.5 per cent in the three months to end of June; significantly above the original estimate of 1.7 per cent and more than double the rate seen during the first quarter.

For its part the UK GDP rose to 0.7 per cent in the second quarter, an increase from the preliminary estimate of 0.6 per cent and like the US, more than twice level notched up during the first quarter. Even the long-embattled eurozone managed to register growth of rose 0.3 percent in the three month period.

But despite the cheer brought on by the generally positive news-flow, investors are still gingerly awaiting the inevitable tapering of the US quantitative easing programme as the world switches to a more normal environment of monetary policy. However with the auto sector and the housing market on a far more solid footing and job generation in the US is back to its pre-financial crisis levels, where some 200,000 private sector jobs are emerging per month, it should come with little surprise that the fiscal handholding is coming to an end

Aberdeen Asset Management co-head of multi-manager portfolios Aidan Kearney during the recent market weakness, increased his equity allocation to take advantage. He says: “The US housing market has recovered very strongly over the past year which has a significant multiplier effect for the broader economy, not to mention the positive impact on US consumers.”

Kearney adds investors would be wise to remember QE is not being withdrawn at once, but rather the amount the authorities will instigate on a monthly basis will decline, thereby slowing the party in a measured manner.

Henderson head of multi-asset Bill McQuaker says: “The US arguably led the way into the financial crisis and it now appears to be leading the way out. Adding further cause for optimism, the weakness seen in oil and gasoline prices should be putting money in Americans’ pockets at the same time that rising house prices are boosting consumer confidence.”

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