2011 market outlooks from Ignis Asset Management

 

• Global equities – by James Smith, manager of the Ignis Global Growth Fund
• Property – by George Shaw, manager of the Ignis UK Property Fund
• Corporate Bonds – by Chris Bowie, manager of the Ignis Corporate Bond Fund
• UK equities – by Neil Richardson, Ignis Deputy Head of UK Equities
• US equities – by Terry Ewing, manager of the Ignis American Growth Fund
• European equities – by Ian Ormiston, manager of the Ignis European Growth Fund
• Euro small cap – by Ian Ormiston, manager of the Ignis European Smaller Companies Fund
• Global economy – by Stuart Thomson, Chief Economist
• Multi-manager – by Simon Mungall, Head of Multi-manager

 
 
Global equities – 2011 outlook
UK and Europe world’s most attractive stock markets, says James Smith, manager of the Ignis Global Growth Fund
 

• Likes: UK, Europe, financials and pharma
• Dislikes: US, Asia ex-Japan

 
“Equities are the place to be in 2011. Earnings growth is good and companies are well placed to increase dividends. Markets, distracted by macro concerns, have, however, ignored these positives – an oversight I expect to be rectified in 2011.
 
“UK and European equities are trading at bargain valuations and I am significantly overweight those two areas. Vodafone, GKN, Allianz and BNP Paribas are key holdings.
 
“Japan, finally seeing earnings upgrades, also looks attractive – I particularly like Seven & i Holdings – but emerging markets, to a value investor, look expensive relative to their growth prospects.
 
“The US is perhaps the least appealing major market just now. Although it boasts some great companies and the growth recovery is moving along nicely, the US market just does not look good value. I am also underweight Asia, where equities look similarly expensive relative to history and other regions.
 
“From a sector perspective, financials are attractive, particularly following recent weakness. Despite sovereign debt issues financials’ earnings power remains excellent. The savage sell-off made cheap stocks cheaper and they look great value. Banco Santander, for instance, should trade at a price-to-book ratio of 1.2 but is trading at 0.8 – presumably because it is based in troubled Spain. Barclays is another quality bank which has been erroneously tarred with the ‘bad financials’ brush.
 
“Pharmaceutical companies look attractively priced and they are relatively safe – if boring. Many pharmas have abundant cash flow and dividend-raising potential, but this sector is a slow burn and investors must be patient.
 
“Overall, quantitative easing in the US should provide liquidity support in the first and second quarters if a recovery in demand fails to materialise. But my expectation is that global GDP growth will rise, albeit gradually, and equities will do well.”
 
 
Property – 2011 outlook
 
Property to deliver 7-8% in 2011 with income driving total returns, says George Shaw, manager of the Ignis UK Property Fund
 

• Likes: Prime stock, the South East, food superstores
• Dislikes: Falling yield at secondary end of market

 
“Looking forward to 2011 we envisage all property total returns for the year to be in the region of 7% to 8% dominated by income returns. The year is also likely to be a period of opposing dynamics of a positive drive on yields for prime stock clashing with the negative impact of falling yields at the secondary end of the market. Positive rental growth is likely to remain restricted to a few select markets.
 
“The majority of risks lie in the wider economy. Despite two consecutive quarters of economic growth and improved forecasts, the full effects of the Government’s Comprehensive Spending Review and overall austerity measures have yet to be absorbed. As the general prospects for rental growth and further yield compression remain weak, out-performance over the short term will be achieved through income management.
 
“The Ignis UK Property Fund will continue to hold and seek to acquire further attractive prime stocks in addition to focusing on strengthening and proactively managing the income stream. In addition to comprising predominantly of prime properties, the sector, geographical and diversified tenant exposure of the fund should continue to prove advantageous.
 
“Geographically we continue to favour the South East markets where economic prospects are higher. Multi-let assets offer income and asset management opportunities. The Central London office market, where rental growth prospects are positive, in part due to a perceived imbalance between supply and demand through 2011/2012, will remain key to all property performance. In addition to Central London office we currently favour food superstores, South East industrial estates and high quality retail warehouses, although, as always opportunities are highly stock specific.”
 
 
Corporate bonds – 2011 outlook
 
Corporate bonds to continue to outperform, but not to the same extent as 2010, says Chris Bowie, manager of the Ignis Corporate Bond Fund

• Likes: Utilities, TMT and secured supermarket paper
• Dislikes: Financials

 
“Corporate bonds outperformed pretty much everything in 2010, and I think they will again in 2011. But let’s not kid ourselves that returns will be anywhere near as good as the 10% or so the best corporate bond funds have returned this year. For next year, total returns of 5% or so are far more likely. Why? Because 2011 will be a year of strong headwinds.
 
“Firstly, the real economy in the UK will be a challenging place in which to do business. Not in the sense that we will be in a recession – far from it, as we expect growth to be in the 1-2% range. But modest growth will not lead to a substantial improvement in private sector employment, especially not on a net basis with the contraction of the public sector payrolls that we expect.  Because of that, the outlook for domestic consumption is not good enough to get excited about and it makes it hard for companies to grow their top line revenues materially.
 
“Secondly, the financial sector continues to have significant problems. In 2008 the balance sheet issue facing UK banks was one of improper financial assets – in 2011 the issue will be one of commercial property exposures that need to be marked more appropriately. Add in the regulatory changes that mean banks need to hold more capital on their balance sheets and the ability for UK banks to extend credit to business and consumers looks somewhat compromised. For these reasons we have a major underweight position in banks at present.
 
“Thirdly, sovereign debt issues may again dominate headlines. As I write this it looks like a proper bailout package for Ireland has been agreed, but who will be next? Portugal as a sovereign may have issues funding itself in the bond markets and this could spill over into Spain and even Italy in a worst case scenario. Is the patience of the German taxpayer infinite? Angela Merkel has already publicly talked of senior bank creditors being haircut at some point, most likely post 2013 for new issuance. But if senior bank bondholders (who rank pari passu, or equally, with depositors) are going to be defaulted on, is that really an environment in which you wish to own risk assets?
 
“Putting this all together, my sense is that 2011 will be a challenging environment for all risk assets, but especially equities and property. With cash yielding next to nothing, and risks of capital losses from riskier assets, 5% from corporate bonds is the best game in town. That’s why all of my money continues to be invested in credit.”
 
UK equities – 2011 outlook
 
UK economy will be much stronger and resilient than forecast, says Neil Richardson, Ignis Deputy Head of UK equities
 

• UK economic prospects much brighter than assumed
• Early signs are that Government efforts to encourage private sector job creation are working
• Global growth, and a competitive currency, will boost the UK in 2011 – and beyond

 
“Much has been written on the gross imbalances in the UK economy, and how post the credit crunch the economy is inevitably doomed to a prolonged period of near-recessionary conditions. We take a much more optimistic view on the UK’s prospects.
 
“First, the UK – allegedly constrained by a wheezing industrial sector – is still the world’s sixth largest industrial power, bigger than France or Italy. The devaluation of sterling and the recovery in global trade is therefore stimulating a substantial portion of the economy.
 
“Second, the Treasury and the Bank of England’s plan to encourage the private sector to take up the slack created by the contraction of the public sector appears to be working. The early signs are certainly encouraging, with private sector job creation surpassing all forecasts – 308,000 in 2Q10 alone. 
 
“Third, the government’s efforts to reduce the economy’s dependence on domestic consumption should not derail the recovery. No doubt UK consumers have too much debt and will pay higher taxes in 2011, which will crimp spending. However some adjustment to the “new norm” has already been made – e.g. the savings ratio. If private sector job creation continues at current levels, as we expect, then consumption need not act as a substantial drag on economic growth.
 
“Indeed, economic growth around the world has confounded the bears, and the momentum going in to 2011 augers well for further upward revisions to forecasts – even before the US Fed’s quantitative easing and the extension of the Bush tax cuts further stimulate the US. The UK, as a major trading nation, is a natural beneficiary of the expected acceleration in global growth. The dynamic private sector is taking advantage of the opportunities that this offers, aided by a competitive currency. We believe that the first half of 2011 and beyond will see a resilient, strong UK economy.”
 
US equities – 2011 outlook
US equities will move higher in 2011 as economic growth improves, says Terry Ewing, manager of the Ignis American Growth Fund
 

• Likes: Washington moves to the centre, tax breaks, good corporate earnings, recovery in small business confidence, rising M&A, allocation into equities
• Dislikes: Risk that China increases interest rates too much, European debt crisis, deficit to be a greater concern by end 2011

 
“There are a variety of incremental catalysts that can drive equities higher in the near term. Tax policy is one. We expect Congress to approve an extension to the Bush tax cuts, but President Obama has also thrashed out with Republicans a $120bn payroll tax holiday that should have a stimulative effect on economic growth and offer support to equities.
 
“Indeed, a key support for the market is the improving outlook for economic growth. GDP estimates have been revised to over 3%. News flow should therefore improve on the employment market, and higher job growth will provide comfort for the equity market – although not the bond market.
 
“Overall we believe market growth will be driven by better than expected profits growth of over 10%, solid margin performance, a recovery in the lagging financial sector, support from emerging market growth and a switch from bonds to equities by asset allocators.
 
“We also expect the US dollar to strengthen against the euro and sterling – in the latter case due to consumption weakness post-Christmas – which should add to the attractiveness of US equities for sterling investors. The risk is that the dollar and bond yields rise too fast, which would be dislocative to the global economy. QE should, however, act as a check on both.
 
“Two overseas factors pose further risks. The first is that the Chinese authorities’ efforts to dampen inflation – by imposing lending constraints and hiking interest rates – impede demand. The second is that, if peripheral European bonds weaken further on sovereign debt issues, risk sentiment suffers.
 
“But it is perhaps worth noting the following. This is the third year in both the Presidential cycle and the economic recovery. There are only five previous occasions in the last 111 years where both events have taken place in the same year and they produced an average market gain of 21%. Could they again?”
European equities – 2011 outlook
Bold investors will get good returns from Europe, says Ian Ormiston, manager of the Ignis European Growth Fund
 

• Likes: Weaker Euro, M&A, international companies
• Dislikes: Macro noise, bond market threat

 
“As the year of the tiger gives way to the year of the rabbit in 2011, will investors move from the emerging market tiger economies back to the developed world, or will Europe remain a rabbit trapped in the headlights of the capital flow juggernaut? The answer for 2011 remains the same as it did for 2010, with the Eurozone periphery, including Ireland the onetime Celtic tiger, dominating the headlines but the large northern economies with healthy government, corporate and domestic finances delivering sound economic growth and market returns.
 
“The balance between negative sentiment and positive fundamentals creates an excellent opportunity for Europe’s successful companies, which derive a large portion of their earnings outside Europe, as the fall in the value of the Euro benefits them.
 
“Merger and acquisition activity should be a support for equity markets in 2011, as companies are sitting on more cash than before the crisis and valuations make acquisitions or buybacks a highly attractive use of cash. The biggest risk to European equities in 2011 is if the bond markets continue to pick off peripheral countries one-by-one. Portugal will soon follow Greece and Ireland into seeking help but the big prize in the battle for the Euro remains Spain; and this test of European political resolve versus market dynamics represents the biggest sentiment driver in the coming year.
 
“The fund’s positioning reflects the trends highlighted above with a country tilt to the North and a bias towards international companies that benefit from booming demand in emerging economies such as luxury groups Richemont and LVMH and jewellery group Pandora. A substantial portion of the fund is given up to mid-sized companies with strong underlying growth drivers such as defence and auto group Rheinmetall, outdoor advertiser JC Decaux and banking and retail software supplier Wincor Nixdorf.
 
“The macro noise will not abate in 2011 but solid companies will continue to deliver strong profit growth and equity returns to the bold investor.”
European small cap – 2011 outlook
 
Euro small caps can continue strong performance of last two years, says Ian Ormiston, manager of the Ignis European Smaller Companies Fund
 

• Likes: Abundance of growth opportunities, takeover potential
• Dislikes: Macro distraction

 
“Most headlines about European markets in 2010 have centred on the crisis in the Eurozone and so it will be a surprise to many to discover that the perceived risky area of European equities, its small cap market, has delivered strong positive returns for the second consecutive year. Many of the factors that have contributed to that performance remain in place and I expect further gains from small caps in 2011.
 
“Smaller companies investing is by definition unconstrained and so the big investment theme of 2010, which will continue to predominate in 2011, has been easy to follow, namely country investing. The Eurozone periphery will continue to dominate the headlines but the large Northern economies with healthy government, corporate and domestic finances will continue delivering sound economic growth and market returns.
 
“Merger and acquisition activity should continue to be a support, as companies are sitting on more cash than before the crisis and valuations make acquisitions or buybacks a highly attractive use of cash. Small caps are particularly attractive as takeover candidates as they represent less risk in terms of integration and can often be funded out of larger companies’ cashflow rather than requiring finance from banks or the bond market. The key attraction of small caps in a world sagging under the weight of government debt is that growth opportunities are relatively abundant in this asset class.
 
“The fund reflects the trends highlighted above with a country tilt to the North and a bias towards companies with strong underlying growth drivers such as defence and auto group Rheinmetall, jeweller Pandora and banking and retail software supplier Wincor Nixdorf.
 
“The macro noise will not abate in 2011 but solid companies will continue to deliver strong profit growth and small cap returns to the bold investor.”
 
Global economy – 2011 outlook
More QE in US and UK inevitable as growth in major economies slows sharply over the summer, says Stuart Thomson, Chief Economist.

• Global growth to stall in second half of the year
• US to embark on QE3 to stimulate growth
• Bank of England will be forced to follow suit as UK economy stalls in H2

 
“The beginning of the credit crunch in 2007 brought the Great Moderation and Mervyn King’s NICE (Non-Inflationary, Constant Expansion) decade to a crashing halt. We are now experiencing the VILE decade (Volatile Inflation, Limited Expansion) which typically follows major financial and property recessions.
 
“More importantly, in a global deleveraging environment, macro and financial market volatility is set to remain high and investors’ watchword should be to expect the unexpected. 2008 brought the collapse of Bear Sterns, Lehman Brothers and AIG. 2009 brought the Great Reflation trade from global governments and central banks with massive quantitative easing from the Federal Reserve and the Bank of England. 2010 brought the European Sovereign debt crisis and the bailout of both Greece and Ireland.
 
“2011 will undoubtedly bring more stress and distressed debt for the European peripheral economies. US Fed stimulus from its second quantitative easing program will help global growth during the first half of the year, but this will encourage developing economies to tighten policy, particularly China. We do not believe that the major industrialised economies have achieved escape velocity and the summer will bring a marked slowdown in growth, forcing the Fed to provide a third substantial program of quantitative easing purchases of government bonds.
 
“We believe that, having steered clear of QE2 as the economy rebounded faster than expected in 2010, the Bank of England will be forced to match the Fed’s QE programme as the fiscal austerity slows the UK economy back to stall speed during the second half of the year.”
 
 
 
Multi-manager – 2011 outlook
 
Risk assets to remain in thrall to central banks in 2011, says Simon Mungall, head of Multi-manager 

• Central bank interventions will continue to drive asset performance next year
• More QE likely – but risks unintended consequences
• Equity markets to fall if QE taps turn off in June

 
“2011 will see the continuation of the market’s obsession with the provision of central bank liquidity to capital markets. As expectations of liquidity injections ebbed and flowed throughout 2010, so did allocations to risk assets. In 2011 too, the performance of risk assets will be tied to how the market perceives the behaviour of the Federal Reserve and other central banks.
 
“As we grapple with the dilemma of how to return the global economy to a healthy equilibrium, there are essentially two competing philosophies. The first, and most honourable, is to increase productivity by education and innovation. The second, which is now looking like the path of least resistance, is to inflate our way out of debt and back to growth by printing money. History has shown us that while this may seem like the least painful option at the time, it can have unintended negative economic and human consequences thereafter.
 
“Europe will also continue to chip away at the market’s confidence. The ambition of its political bureaucracy has overreached the economic fundamentals of the constituent sovereign states. Whilst there is a very strong practical imperative to keep the euro together, this will require extreme changes to the underlying sovereign political structures. Undoubtedly this process will take decades to complete, but the next 12 months will surely play host to some significant developments in this direction, in parallel with the market continuing to challenge the integrity of peripheral Europe.
 
“We think GDP prints may be unexpectedly strong in the first half of 2011, with recent monetary stimulus and the legacy of recently loose fiscal conditions having a positive effect on growth and equity performance. However, should the Fed decide to turn off the QE tap in June, equity markets are bound to respond unfavourably. Overall, 2011 will be another year in which central banks, and their interventions into capital markets, will determine investors’ appetite for risk.”