P&I June 13, 2016
Tom Nelson sees investment opportunities popping up weekly and monthly. What he doesn’t see, however, is the catalyst for the next big correction.
“No crystal ball can tell us what will be the next step for any given asset class,” said Nelson, senior vice president and director of investment solutions at Franklin Templeton Solutions. “The key is making sure that we have a robust process that uses lots of resources and inputs, that we’re thoughtful and disciplined long-term investors with an ability to take opportunities as they present themselves.”
Where does he see opportunity right now? For equities, in Europe.
“We believe European equities offer better value compared to the United States, which has done very well over the last few years,” he said. “U.S. equity valuations are on the rich side, especially in light of the fact that now we may be moving into a slower growth, Fed-tightening- type of cycle where earnings just kind of muddle through.”
There are plenty of reasons why Europe can outperform the U.S. over the next 12 to 24 months, according to Brian Meath, chief investment officer for multi-asset solutions at Russell Investments.
“Whether it’s because European governments are no longer in contractionary mode or the benefit of a lower euro for exports, earnings expectations in Europe are not coming down as fast as they are in the U.S.,” he said. “European valuations are just more supportive.”
Ash Alankar, global head of asset allocation and risk management for Janus Capital Group, agreed. “Some rallies are sustainable, others not so much,” he said. “In the U.S., for example, the options market indicates that investors are moving toward equities more as a yield play than a growth play. And while it may drive an equity rally, equities should not be priced on yield, and we believe that such a rally is neither stable nor resilient. So our view is that the rally in U.S. equities might be fleeting.”
Nelson said he believes emerging markets may be on the verge of a rebound. “The China slowdown does not appear to be as bad as initially feared, and that could be a tailwind for the broader EM Asia region,” he said.
“While we have had an underweight to emerging markets, we have been upgrading that view,” added Jeff Geller, chief investment officer for multi-asset solutions for the Americas at JPMorgan Asset Management. “The signals we look at are now probably more neutral with respect to developed vs. emerging when you look at valuation and fundamentals. We are also seeing more stability in emerging market currency and commodities. Given where valuations are, even though the fundamental outlook still remains negative, we have moderated that negative view, and it’s appropriate to not have such an extreme underweight in portfolios.”
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