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Tony Lanning: Outlook for 2014 and beyond is positive

The slow pace of economic recovery means there is still plenty of scope for growth, particularly in western developed markets.


Although we are now five years into a recovery, this does not look like a “normal” cycle. In a typical cycle, we would now be nearing the end of the recovery phase and beginning to enter a slowdown. However, because this recovery has been so anaemic and there remains a huge amount of spare capacity, the inflationary pressures are simply not there.

In fact, we believe we are just at the start of a sustained upswing and that the current cycle will last another three to four years.

Growth in 2014 will benefit from a much lower level of fiscal drag, both in the US and Europe as austerity measures begin to wane. As confidence returns, capital spending – which remains highly depressed relative to history – will accelerate.

Credit conditions also continue to thaw, with banks more willing to lend and consumers more willing to borrow. As the recovery takes hold, a mild amount of wage growth combined with low inflation will be supportive to consumption.

As a consequence of our positive growth outlook, we continue to have a “risk-on” bias, expressed via an overweight in equities and credit. However, we have to recognise that 2013 has been all about a re-rating in the equity world. Earnings growth has stagnated and the 20-25 per cent gain in most developed world markets year-to-date has been achieved purely through multiple expansion.

Whilst we cannot rule out a further re-rating, especially given equities remain attractive relative to other asset classes, we need to start to see earnings growth coming through in order to justify some of the valuations we are observing. Any failure to do so would be a warning sign.

At a regional level we remain most positive on the US, Europe and UK. We also retain exposure to emerging markets and Japan.

We are also looking for more tactical trades in unloved areas of the market that have significantly lagged the broader market. One such trade is a recent investment into the mining sector, which has fallen deeply out of favour as consensus surrounding China has become universally bearish.

We believe the sector is one of the few cyclical plays offering good value and that it will benefit from a pick-up in global economic momentum. Further to this, significant changes at a company management level have seen a much increased focus on cash flow as opposed to simply growth. As such, we see significant upside in the sector.

If we briefly look back at the lessons learned from what worked last year, our highest conviction positioning has been to be overweight US equities. In the highest risk Fusion fund (Growth Plus) this has been as high as 45 per cent of the portfolio. Although more recently we have been reducing this overweight in favour of other regions, if  we were to see a correction in US markets we would assess that as an opportunity to potentially add more US back to our the portfolio at cheaper valuations.

In contrast, we began the year with a more cautious view on Europe and as data has improved so has our conviction with our positions in Continental Europe now the highest they have been all year.

While the debate around the timing of the US tapering its stimulus will inevitably mean financial markets will remain volatile into next year we are alert to the possibility that we could see an element of mean reversion as investors begin to rotate from markets that have out performed into those that have lagged.

Our ability to select active managers with the ability to navigate market volatility and pick compelling investment opportunities will continue to be a critical differentiator in providing strong absolute and relative returns to our investors.

Tony Lanning is portfolio manager of JPM Fusion Funds



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