News

Most developed equity markets have had a nervous start to the year following a very strong 2013. We believe one of the primary reasons for this weakness has been a realisation that the reduction in the pace of US money printing (tapering) could have a significant negative impact on emerging markets, and what that could mean for the wider global economy. The recent fall in equity markets can also be attributed to a very sharp decline in the US manufacturers confidence survey.

We agree with the first of these concerns and sold our emerging markets fund as a result. As for the relatively poor US manufacturers confidence survey, indications suggest that bad weather was a significant factor. Short-term events can often influence regular surveys such as this, and we are optimistic that it should rebound in the next few months to reflect longer-term factors, in particular the improving underlying US economy.

As a result, we intend to remain overweight in developed market equities unless the economic outlook deteriorates further from here (which is not our central assumption). We believe developed economies will accelerate this year because interest rates will remain very low, banks are in much better shape than five years ago and government austerity is decreasing in the US and Europe.

Japan, the world's third largest economy, should also support global growth in 2014. The central bank is printing significant amounts of money and there are now more jobs than applicants with unemployment at only 3.7%. This should lead to wage growth. Industrial production there is already growing at 7% year-on-year, house building is up by 18% and vehicle sales are up 27%. Inflation excluding food and energy costs is 0.7%, the highest since 1998.

Despite these fundamental improvements, Japanese equities have fallen by around 10% this year as investors have taken profits on their 54% gains from last year. We would view this as a buying opportunity if we weren't already overweight. We do not believe that the slowdown in emerging markets will be significant enough to seriously damage Japanese exports, and we believe that fundamentally a stronger US economy and US tapering whilst the Bank of Japan continues to ease is negative for the yen, which helps Japanese exporters. Our recent thought piece explains why we remain positive on Japanese equities in more detail.

Please note that the above information is believed to be correct but cannot be guaranteed. The opinions constitute our judgement at the time of writing and are subject to change. This is not intended as an offer or solicitation to buy or sell securities or other investment or banking products, nor does it constitute a personal recommendation.