Marco Pirondini, Head of Equities – US at Pioneer Investments, discuss with Funds Society, in this interview, his outlook for 2016.
In the current environment, do you consider the premium offered by equity markets attractive? Is it worth investing in this asset class rather than in bonds or cash?
We think that equities are fairly valued on an absolute basis but are attractive relative to other asset classes such as bonds, which are for the most part overvalued. In other words, equity risk premium are high by historical standards and this tend to correlate with future long term returns. For this reason, we like the long-term outlook for equities better than bonds.
Double digits returns have been seen last years… do you expect this trend to be continued or must investors lower their expectations on global equities?
We expect that equities could continue to offer double-digit returns measured in euros. That is partly because of improving earnings and partly because the euro should continue to depreciate. With respect to earnings, we think earnings globally will grow modestly next year despite headwinds from lower commodity prices and weak industrial demand as consumers continue to spend. Earnings are forecasted to grow double digits, measured in euros, and should be very supportive of equity valuations in 2016.
Divergent monetary policies in the U.S. and Europe will likely result in continued depreciation of the euro vs. the dollar, which will benefit European investors in U.S. and global equities, as the U.S. is the largest portion within global equity asset allocations.
We have also started to notice higher volatility levels, is it likely to see this trend on the coming year or you expect the opposite?
Volatility has increased in the last few months but is still relatively low by historical standards. We do not expect volatility to change significantly. If volatility does increase, we would view declines as a buying opportunity as we believe we are in a secular bull market for equities.
What are the main risks for the asset class: the Chinese transition, rate hikes by the FED…? How might these factors affect?
On top of the usual geopolitical risks, which include terrorism, the civil war and dislocation in Syria, and instability in some emerging market countries, a credit crisis generated by low commodity prices is probably the most imminent risk. While we believe there will be severe credit issues with companies in or exposed to the energy industry, we do not believe this will result in a global credit crisis, which would negatively impact equities as well as bonds.
Alternatively, we believe one of the risks investors have been most concerned about, a FED increase rate hike, will be a positive for U.S. equities, as equities usually rise in the first year of a rate increase. In particular, owning high quality companies with strong fundamentals is usually to best way to invest in a rising rate environment as they are typically growing and have strong enough fundamentals to cope with the unexpected.
Talking about regions, what are your winner bets? Which ones are properly valuated and offer the best opportunities?
We think that Japan is the most interesting region. It offers a unique combination of low valuations and improving earnings driven by better corporate governance. We also think the while the U.S. is fairly valued overall, there are opportunities to own world class health care and financial services companies at attractive valuations relative to international peers.
Is this a good moment to invest in the emerging markets?
We believe emerging markets are still risky because many of the countries have accumulated substantial amounts of dollar debt in the last few years. The emerging markets picture remains extremely varied. We expected modest growth in some countries supported by a pick-up in demand from developed markets and by some stabilization in countries that experienced strong contractions in 2015.
Is the long bull market cycle in US equities set to continue and if so, why?
Well definitely it has been a very long bull cycle. In the last 100 years this is the longest period of market expansion without a 20% correction, so that’s a very very high bar. A correction is possible, someone would say even likely, though it’s very difficult to see in the markets the reasons why we should have that correction. We haven’t seen excesses in valuations, we haven’t seen excesses in investments, the bullishness of investors towards equities is not particularly high.... So it’s very difficult to see what could cause a correction. What I can say is that every time the market in the US has passed its previous peak - and this has happened in 2013 in the US - it was the beginning of a very long bull cycle with some big corrections in them, but usually cycles that lasted 15 – 20 years. Honestly, I think that we may have corrections but the bull cycle in the US is going to last for a long time.
On a sector basis then, where do you see the main opportunities for US equity investors over the next twelve months?
When we look at 2016, we see opportunities in sectors where the US market has companies that are global leaders but are also exposed to some very powerful long-term trends like innovation, and like the ageing population in developed markets. In particular, we like companies in the technology sector, companies in the pharmaceuticals sector, I would say more established larger cap companies – in general we prefer large cap to small cap in the US in 2016. But we also see other opportunities, for example in financials. Financials has been a sector that has underperformed for many years, since the financial crisis really, and we think that 2016 could surprise a little with interest rates going up, we think that more financial companies could actually improve their earnings and start to pay some dividends and this will probably help their performance. Generally speaking though, we tend to prefer stable growth companies over value investments.