Why Japan, Europe and Asia could do well and funds to buy

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There are no guarantees in the world of investment but years of experience and careful analysis can be drawn on to help shape decision making.

That’s why we’ve asked a leading investment expert to share his view of what 2018 may have in store. 

Here Mark Burgess, deputy global chief investment officer at Columbia Threadneedle Investments, takes us through the issues he believes could affect regions and sectors of the world economy and touches on his company’s strategy to overcome any headwinds. 

And we’ve also asked Darius McDermott, managing director of Fund Calibre, for his recommendations of suitable funds for investing along a similar approach to Columbia Threadneedle’s for 2018. 

Land of promise: Colombia Threadneedle prefers Japan and Asian emerging markets for 2018

Land of promise: Colombia Threadneedle prefers Japan and Asian emerging markets for 2018

Mark Burgess: The global economy, with the exception of the UK, is going through a period of synchronised expansion. 

Corporate profits are rising, trade is increasing, and growth is robust in the US, Europe and beyond. 

Asia is benefiting from this global phenomenon and from a continued uplift in China. Japanese equities in particular are finding a ‘sweet spot’ due to increased strength in corporate earnings and evidence of ongoing corporate reform driving better returns for shareholders. 

On a monetary policy level, despite the US Federal Reserve raising interest rates in North America and the Bank of England raising rates for the first time in a decade, money remains relatively cheap for companies and consumers to borrow, stimulating growth.

Against this backdrop, it is not surprising that share prices are at current high levels. All things being equal, we prefer equities in 2018 compared to credit (company debt) and government bonds. 

Mark Burgess says Columbia Threadneedle prefers equities over company debt and government bonds for 2018

Mark Burgess says Columbia Threadneedle prefers equities over company debt and government bonds for 2018

Mark Burgess says Columbia Threadneedle prefers equities over company debt and government bonds for 2018

However, as investors we must ask ourselves what could upset this positive outlook. 

There are geopolitical risks on the horizon, including Brexit, potential instability in Europe and US relations with North Korea, China and Mexico. 

We are also keeping an eye on inflation where an inflationary shock could destablise markets.

Equities 

We expect corporate earnings growth of 10 to 15 per cent in 2018 supported by ‘Goldilocks’ conditions of moderate economic growth, low inflation and asset-friendly monetary policy. 

Our preferred regions are Japan, Europe ex-UK and Asian emerging markets.

We forecast corporate earnings growth of 8 per cent for Japan next year, supported by higher than expected economic growth, corporate reform, receding political risk, and easy monetary policy. The commitment from a rising number of Japanese companies to improve return on equity is an important factor.

Continued robust performance across the euro area is aided by strong manufacturing data and demand, while domestic consumption – a key factor for ongoing growth – has been boosted by rising employment numbers and improving household balance sheets. 

Confidence is high, business is buoyant and jobs are being created at an impressive pace, and so against this backdrop we believe European corporate earnings can grow by 15 per cent next year.

But all eyes will be on the pace of the ECB’s taper, the end of Quantitative Easing, and interest rate rises. The ECB is still buying bonds worth €60 billion a month and, even after it reduces these flows in 2018, it is likely to be ‘in the market’ for most of the year. 

But as the European recovery gathers steam, the ECB may well begin to question whether its easy policy stance remains appropriate.

Fixed income

The demand for high-quality income will remain a theme – this is unlikely to change given aging demographics around the world. However, given where starting yields are today, investors are unlikely to see strong excess returns from credit markets.

We have had a long-standing negative stance on core government bonds and this has not changed – we still believe them to be vulnerable and they are far too richly valued for our liking.

Within credit the European high yield corporate bond market offers marginally more upside than the corporate investment grade market.

However, with yields at such low levels by historical standards there are clearly risks that bond markets are due a correction.

FUND TIPS 

We asked Darius McDermott, managing director of funds rating service FundCalibre, to suggest a top fund for exposure in Japan, Europe ex-UK and Asian ex-Japan respectively as well as fixed income. Here are his recommendations. 

Baillie Gifford Japanese 

The Baillie Gifford Japanese fund targets growth over the long term through investment in any economic sector in Japan. Up to 10 per cent of the fund’s value can be invested in collective investment schemes and deposits.

The fund has an ongoing charge figure (OCF) of 0.63 per cent and has returned 173.95 per cent over the past five years.

Darius McDermott of FundCalibre suggests funds for exposure in regions across the world as well as fixed income

Darius McDermott of FundCalibre suggests funds for exposure in regions across the world as well as fixed income

Darius McDermott of FundCalibre suggests funds for exposure in regions across the world as well as fixed income

‘Baillie Gifford have one of the strongest Japan Equity teams around and any one of their funds are worth consideration,’ according to McDermott.

‘Trusts are at a quite high premium now though so this open ended one is preferred.’

Threadneedle European Select

The fund invests at least two-thirds of its assets in shares of companies with what the management team deems as good growth prospects in Continental Europe or companies that have significant operations there. 

McDermott said: ‘It is a great core fund with a fantastic manager. It holds positions for the long term and invests in good quality companies.’

The fund levies an OCF of 0.83 per cent and has returned 89.13 per cent over the past five years.

JOHCM Asia ex Japan 

For Asia, McDermott singles out the JOHCM Asia ex Japan fund which invests solely in equities in the region. 

The fund charges an OCF of 1.03 per cent and boasts five-year returns of 78.28 per cent.

McDermott said: ‘The fund is managed by a very experienced team who have proven themselves through market cycles and the Asian financial crisis.’

For fixed income 

McDermott favours  AXA Sterling Credit Short Duration fund, which targets quarterly income payments through investments in mainly sterling denominated investment grade bonds with a bias towards shorter maturities.

The fund has an OCF 0.42 per cent and has returned 8.99 per cent over the past five years.

He also heralds Baillie Gifford Corporate Bond, which aims to produce a high level of monthly income by investing primarily in a diversified portfolio of investment grade and sub-investment grade fixed interest securities. 

These investments can be denominated in sterling or in currencies other than sterling and hedged back to sterling.

The fund has an OCF of 0.53 per cent and recorded returns of 35.11 per cent over the past five years.

McDermott said: ‘AXA Sterling Credit Short Duration if you want very little interest rate risk or Baillie Gifford Corporate Bond which is actually a strategic bond with a very good manager and which can invest across the fixed income spectrum.’

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