Portfolio manager Kasim Zafar tell us why EQ Investors are overweight absolute return in the face of mediocre growth.
'EQ expects a tough 2016, with mediocre growth as major markets remain in bear territory.
We believe the US economy faces some headwinds in the short term, but fundamentally we do not see anything major that causes us alarm from a macro perspective, other than potential spillover effects from the energy sector’s current woes.
In Europe, there is some weakness in the core which we are monitoring, but peripheral countries are looking in good shape and there is a supportive central bank. In emerging markets there is a very clear divide between commodity importers and exporters. Meanwhile, the UK faces its own unique risks with ‘Brexit’, that is an exit from the EU.
Globally, we are seeing a divide between basic industries and services, driven largely by the progressive rebalancing of China from a manufacturing-based economy towards a more sustainable consumer driven economy.
All of this, however, is well recognised. Consequently, our major concern is how similarly investors are positioned.
This concern is raised further when we look at measures of fundamental value across sectoral lines, where we see alignment of investors with consumer-related sectors that are relatively expensive but that have high expected growth rates.
Beware tail risks
Hence, while we are broadly constructive on the medium-term outlook, our baseline stance is for mediocre headline growth, large sectoral divergence – and all with substantial tail risks. This translates into only small tilts of our asset allocation within equities, while ensuring our managers continue to demonstrate flexibility.
More significantly, for a long time we have been overweight to absolute return strategies. We believe the risk and return characteristics of the niche managers we have identified give us a distinct advantage over holding government bonds, which we see as increasingly expensive. Due to the associated risks, we remain significantly underweight this sector.
The current market rout is starting to throw up some significant opportunities, but in our opinion it is driven more by sentiment and momentum than it is by fundamental value.
We cannot see many reasons for this changing immediately, other than action by central banks to counteract the effect of tightening financial conditions that could spill over into the real economy.
For now, we remain unchanged on our overall equity weighting. We are on the lookout for signs that the imbalances in the energy and commodity spaces are stabilising.
Tech bias favourite
One of our favoured managers at the moment is Priya Kodeeswaran, who runs the RWC Global Innovation Absolute Alpha fund. The fund is a long/short equity strategy, with a bias towards the technology sector.
Kodeeswaran focuses his team’s research in areas where there are significant differences of opinion among the analyst community, taking positions where he believes there is the greatest potential for change.'
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