Property : We continue to see opportunities across global real estate securities......
John Stopford, Manager, Investec Global Multi Asset Income Fund and Head of Multi Asset Income at Investec Asset Management
Yields are reasonable in most regions, providing support to returns. Growth prospects are mixed though varying significantly by region and sector, with London commercial property, for example, continuing to face uncertainty given Brexit concerns. Our focus has therefore shifted towards “alternative” real estate opportunities such as student accommodation, GP practices and logistics/warehouses, which offer greater certainty of regular income, some growth potential and a degree of inflation linkage.
Although valuations are stretched compared to history, the fundamental backdrop remains supportive and helps to justify these levels although momentum has turned negative. The second quarter results season saw the balance of companies within the S&P500 beat both earnings and sales estimates across most sectors. We expect a steady path on rate hikes by the US Federal Reserve although the effect of balance sheet reduction is unknown. Against this backdrop we retain our preference for high-returning companies with earnings visibility that we consider offer better long-term prospects than broader equities.
We remain more cautious on the prospects for UK equities where returns continue to be driven by conflicting factors. The market remains underpinned by easy monetary policy and sterling weakness, both of which are less supportive given a more hawkish central bank and a stronger pound. Uncertainty around Brexit negotiations under a newly formed hung parliament remains, and evidence has emerged of more significant concerns for an economy still reliant on consumer credit and housing.
Fundamentals are continuing to improve with strong sales growth and a generally more supportive macroeconomic backdrop. Valuations are less demanding than for the US although the second quarter results season was more mixed. Longer-term, any normalisation from the European Central Bank (ECB) through tapering is a potential headwind and, while political risks do remain, they are somewhat more contained.
Valuations have normalized and are no longer as compelling. Earnings have bottomed out but have yet to rebound with volumes still weak. Momentum remains positive and is not over extended although has moderated. In China, we have pared back our conviction somewhat although we continue to look for companies that stand to benefit from the country’s reforms, economic rebalancing and supportive valuation.
Government bond yields reflect slow trend growth, loose monetary policy and low inflation expectations. We see some cyclical risks from less accommodative central banks, especially now that the market has all but given up on FOMC tightening. We prefer markets where policy is well behind the US, or priced to tighten too much. Emerging bond markets offer reasonable relative value and many of the higher yielders continue to benefit from inflation and interest rate convergence with major markets. Corporate bonds are expensive, with spreads back at multi-year lows. The fundamental back drop is favourable whilst inflows into the asset class remain strong and macro risks are still benign.