Emerging market value
A five-year bull market has left us in a world where the majority of asset markets no longer remain cheap. Finding true value is becoming increasingly difficult, as central bank policies such as quantitative easing have forced investors to shoulder more and more risk as yields on the safest assets have been suppressed.
One area where we do see value, however, is in emerging market equities, more specifically in some of the unloved areas such as China and Russia. Longer term, aligning yourself to the rise of the emerging market consumer is likely to be the most profitable theme, although, in the short run, we think the unloved areas of emerging markets have become too cheap.
The recent price action of the Chinese banks, which have been breaking upwards through key technical levels despite the continued torrent of bad news coming out of the Chinese property market, is an indication there may be no more sellers left.
As a result, even the return of a marginal buyer could effectively drive prices higher.
The strength of the recovery in the UK economy has caught almost everyone by surprise. The International Monetary Fund was caused much embarrassment after it slashed UK growth forecasts months before the economy began accelerating sharply, while Bank governor Mark Carney’s policy of forward guidance was ripped up shortly after its inception due to a plummeting unemployment rate.
It is now becoming clear the recovery in the UK economy is broadening and becoming more sustainable.
This is leading us to become more positive on asset classes such as UK commercial property and, after a brutal sell-off in the April/May rotation, some of the small and mid-cap domestic-facing cyclical stocks.
After a stellar 2013 Japan has been the laggard of developed world stock markets year to date but there are a number of reasons why it remains a high conviction position. Importantly, the near-1 correlation between the yen and the stock market we have witnessed since the beginning of Abenomics is beginning to break down. It is a welcome sign that much of the hot money chasing Japan has left and corporate fundamentals should drive the market from here.
Corporate Japan is awash with cash and unlevered, a fact certain company management teams are becoming more uncomfortable with. Capex is on the rise and we expect the number of companies implementing measures aimed at improving return on equity to accelerate. The corporate restructuring story has a long way to play out but is providing active managers who are prepared to be patient with opportunities.
Tony Lanning is a fund manager on the JPMorgan Fusion Funds range