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Strong U.S. Earnings Season Bodes Well for Stocks

A strong first half for US company earnings bodes well for stocks over the rest of the year, as the country continues to set the tone for global growth, says Robeco strategist Peter van der Welle.

Investors may increasingly look to the US for equity market returns later this year as the European economy remains sluggish, the end of tapering potentially threatens momentum in emerging markets, and the jury is out over whether ‘Abenomics’ is still working in Japan.

Two in three of the S&P 500 members that have so far reported first-half earnings have announced profit figures that were higher than expected, and US earnings are now at an all-time high. Their 3-month forward earnings forecasts for the next 12 months are also positive.

Earnings growth has averaged 10% on an annualized basis, thanks to record profit margin levels of 9.4% and increased sales. Profit margins have been sustained at record levels, helped by declining capital market interest rates since the start of the year, and by subdued wage rises.

“Sales growth is increasing as real US GDP growth rises and that should keep profit growth close to 10% for all of this year,” says Van der Welle. “The main component has been sales growth and very high profit margins, and the fundamentals remain healthy.”

US earnings are streets ahead of other regions in the world

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Source: Robeco.

However from this point forward the upside is more limited, as US rates eventually start to rise and amid increased concerns about rising geopolitical risk, Van der Welle says. Indeed, worldwide equity markets tanked in the first week of August as the Iraqi conflict reared its head again, leading to a resumption of US air strikes.

Much depends on how US growth translates into company profits. Over the past 20 years, a 3% rate of real growth would have generated earnings growth of around 14%, but that is no longer to be expected. This is due to the current economic environment specifics; record high profit margins are not likely to expand further with higher interest rates, and ultimately, gradual rising wage pressures will negatively impact margins as well.

End of easy money

And of these expected headwinds for US earnings, it is the end of easy money which poses the biggest challenge for companies, Van der Welle warns. “We’ve seen lower rates with Treasury rates of 2.4% since the start of the year, and this has contributed to sustained profit margins,” he says.

“Companies will have locked in current rate costs in their planning through hedging and so forth, but rate rises will eventually feed into debt costs moving forward. We still hold the view that Treasury rates will increase towards 3%”

Despite the recent stock market correction, Van der Welle thinks investors will soon go back to looking at improved corporate fundamentals. “Many investors are waiting on the sidelines to see how the current geopolitical picture plays out,” he says. “We had a 4% correction in the S&P 500 due to Iraq and Ukraine, but a technical correction had been long-awaited since the last correction in January. We still have some geopolitical risk, but eventually the market will look through it and focus on the more positive earnings picture.”

Capex rises as predicted

Van der Welle says the positive US corporate outlook bodes well for increasing capital expenditure as companies sit on billions of dollars of cash saved during the deleveraging period since the financial crisis.

“When you look at Q2 GDP figures we have seen on average a 5% rise in capex growth, which confirms our call from last March that it would rise,” he says. “The stronger than expected first-half sales figures also imply more capital expenditure (to keep up with demand), as there has traditionally been a good correlation between net sales growth surprises and capex.”

“But it’s too early to say that capex really is rebounding because we need to see a strong third and fourth quarter, so let’s not cheer too early.”

The Case for High Yield, Revisited

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While volatility has recently increased in the high yield market, Neuberger Berman believes this has been largely driven by technicals, not a downturn in the underlying fundamentals that typically drive performance in the asset class. On a recent Whitepaper (15th August), they discuss the current fundamentals in the high yield market and its performance in different economic environments.

According to Dan Doyle, CFA, Portfolio Manager at Neuberger Berman, rate and political worries aside, conditions are supportive.

“After 10 consecutive months of posting positive returns, the high yield market experienced a setback in July 2014. Triggering this weakness, in our view, were technical factors—not a reversal in underlying fundamentals. More specifically, geopolitical issues in Ukraine, Gaza and Portugal, coupled with the Argentine bond default, negatively impacted investor sentiment. Adding fuel to the fire was robust second-quarter GDP growth that led to expectations that the U.S. Federal Reserve would tighten monetary policy sooner than previously expected. While geopolitical issues are likely to continue, we believe the high yield market experienced nothing more than a short-term correction and some profit taking—and we wouldn’t be surprised to see a fairly quick rebound”, explains.

Generally speaking, high yield performance is driven by fundamentals, such as defaults, as well as the direction of the overall economy. Against this backdrop, they believe that the high yield market remains healthy.

One of the reason is the strong corporate fundamentals. “While volatility has increased, we feel there are many reasons to remain optimistic about high yield. First, corporate fundamentals continue to be supportive, in our view, given generally healthy balance sheets, ample liquidity and cash flows that allow most issuers to handily meet their debt obligations. Against this backdrop, leverage in the overall U.S. high yield market remains modest at 4.1x (debt/EBITDA) versus 5.2x in 2009”.

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New issuance is focused on refinancing

Many corporations have proactively capitalized on the current low interest rate environment to reduce their borrowing costs and extend their maturities. This is evident when looking at the charts below. In 2007, more than half of new issuance was used to fund aggressive actions, such as mergers and acquisitions and leveraged buyouts. Conversely, through the first half of 2014, 60% of new issuance has been used for refinancing.

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Few bonds maturing—limiting default risk

Given the large amount of refinancing, a relatively small amount of high yield debt will be maturing in 2014 and 2015, minimizing pressure on borrowers. The high yield default rate has been—and we feel will continue to be—well below its historical average of 4% over the last 25 years.

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To see the whole report, use this link

Workers Highly Value Their 401(k) but Are More Likely to Get Help Changing Their Oil Than Managing Their Investments

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A new survey finds there is widespread recognition of the 401(k)’s importance, but many workers are not taking full advantage of its benefits.

The nationwide survey of 1,000 401(k) plan participants, commissioned by Schwab Retirement Plan Services, finds that a 401(k) plan is considered a crucial benefit by an overwhelming majority. When asked which benefits are “must haves” aside from health insurance, nearly nine in ten respondents (87%) say a 401(k) is a “must-have” benefit – more than disability insurance (45%), life insurance (42%), extra vacation days (34%) or the ability to telecommute (15%).

Although survey participants clearly want 401(k) plans and appreciate their role in working toward post-retirement financial security, most are not using professional advice that may help improve outcomes. In fact, respondents say they are much more likely to have someone change the oil in their car (87%) than have someone help them choose their 401(k) investments (24%).

According to the survey, on average participants spend roughly the same amount of time reviewing and choosing investments for their 401(k), a lifetime savings vehicle, as they do investigating cell phones, which are often traded in from year to year. And they spend more than twice as much time researching their cars before buying than they do evaluating their 401(k) options.

“Today, responsibility for managing their own retirement investments rests squarely on workers’ shoulders,” noted Steve Anderson, head of Schwab Retirement Plan Services. In fact, the survey finds that nine in ten participants are relying on themselves for the money needed to live in retirement and a majority are using their 401(k) as their primary or sole source of retirement savings.

“With so much at stake, the industry needs to take a more active role in delivering personalized investment advice to help individuals’ 401(k)s work harder for them,” Anderson added. “One-for-all default investments, such as target date funds or balanced funds, can’t be expected to meet the individual needs of workers. The industry can do better.”

Lost? Ask for Directions

The survey finds many participants are still unsure exactly how their retirement benefits work. Half of those surveyed (50%) say their 401(k) plan investment information is more confusing than their health care benefits information. Roughly one in three (34%) admit they feel a lot of stress when it comes to allocating their 401(k) dollars. More than half (59%) wish it was easier to choose the right 401(k) investments.

Today, many 401(k) plans offer some type of professional, personalized investment advice, which can be vital in helping people take better control of their investments. While many of the participants surveyed believe they would likely benefit from this type of assistance, relatively few are actually taking advantage of this critical resource. Specific findings include:

Less than one quarter (23%) of those with access to professional 401(k) advice say they have used it.
Among those not using advice, roughly half (49%) believe they would achieve better investment results if they did so.
A large majority of participants surveyed (70%) say they would feel extremely or very confident in their ability to make the right investment decisions if they enlisted the help of a financial professional. Only 39 percent feel that same level of confidence when making investment decisions on their own.

“Most people see a doctor when they’re sick or a mechanic when their car isn’t running, so why not seek professional help to manage something as important as their 401(k)?” said Anderson. “In many cases, there is a significant difference between how much people need for a comfortable retirement and what they are actually saving. With all of the information providers have about 401(k) participants – age, salary, account balance, savings rate, and more – why leave them on their own, or lump them into target date funds based only on their age when so much more can be done to personalize their savings plans? We know that professional advice can play an important role in helping people save more to bridge the retirement gap.”

According to the survey, six in ten participants are most likely to seek help with retirement planning once they start to approach retirement age, even though getting help sooner may lead to better outcomes. At Schwab Retirement Plan Services, Inc., participants who used third-party, professional 401(k) advice tended to increase their savings rate, were better diversified and stayed the course in their investing decisions.

Difference-Makers That Drive Outcomes

In addition to using professional investment advice, workers can take other steps to get more out of their 401(k) plans, and many survey participants already are. Some of these positive behaviors include:

An overwhelming majority (86%) of participants who get matching contributions from their employer say they are contributing at least enough to receive the full company match.
More than half of survey respondents (57%) have increased their 401(k) contributions in the past two years. Many say they did so because they were concerned about having enough money to retire comfortably.
While many 401(k) plans allow participants to take loans against their account, most of those surveyed seem to recognize that this is a poor choice, as loans can potentially derail a savings plan for years. According to the survey, three-quarters (76%) of respondents have never taken a 401(k) loan.

“With the 401(k) serving as a primary retirement income source for so many, workers and employers are both clearly focused on improving outcomes,” Anderson noted. “While there is certainly room for improvement, we see more workers developing the discipline to save and employers concentrating on impactful plan features like automatic enrollment, automatic savings increases and personalized advice, which can help drive the outcomes we all seek.”

This online survey of U.S. 401(k) participants was conducted by Koski Research for Schwab Retirement Plan Services. The survey is based on 1,000 interviews. Survey respondents worked for companies with at least 25 employees, were current contributors to their 401(k) plans and were 25-75 years old.

ILC Announced Agreement over Banco Internacional

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Chilean Group Inversiones La Construccion, ILC, agreed to terms with Baninter (Banco Internacional, Baninter Factoring y Corredora de Seguros Baninter controlling stakeholder) in order to acquire the financial holding’s controlling interest.

The agreement will be carried out via holding creation in which ILC will have a 50.79% controlling interest after several transactions and capital increases in company subsidiaries.

First, ILC will acquire a stake in the three aforementioned companies (bank, factoring and insurance bróker) from Baninter: (i) a 37.13% stake of the bank, (ii) a 36.94% stake of the factoring company, and (iii) a 50.1% stake of the insurance brokerage company, implying a total price of UF 1,874,461 (~USD 77M) paid by ILC to Baninter.

Second, ILC will subscribe to two capital increases allowing for further stake in the first two companies: (i) the bank will carry out a UF 785,439.8 (~USD 32M) which after the ILC subscription will allow the latter to control a 50.1% stake and (ii) Baninter Factoring will carry out a UF 60,890.9 (~USD 2.5M) also implying a 50.1% stake for ILC.

Lastly, both ILC and Baninter will contribute their assets to the new parent company and will subscribe a shareholder’s agreement and joint action, leaving ILC with a 50.8% stake in the parent company.

Bank

The transaction opens up a range of opportunities in that the bank currently operates at a sub-par scale-loan market share is only ~0.6%) implying lower indicators as compared to industry peers. Trouble is current backdrop could worsen due to a higher competitive environment, stricter regulatory requirements, and liquidity and equity management changes post Basilea III implementation.

This environment may allow for business generation and cost synergies once the bank starts operating under ILC holding. Also, the transaction would enhance the company’s current equity base, handing over USD 35M in fresh resources enabling a scale uprade. LTM bank NIM is currently at 1.6% with a 68.5% efficiency ratio vs. industry’s 2.5% and 46.4%, respectively, which explains the bank’s current 5% ROE differential with system’s 18%.

Regarding other business they still have no relevant information to arrive to any conclusions, although the bank explains ~90% of capital so previous observations should not vary significantly. In short, they believe this is a long-term bet and short-term returns should not be expected, especially in a less-than-ideal economic backdrop.

Valuation

Available information is still not enough to reach definite conclusions; however, at first glance the transaction multiple seems in line or even higher than other banks with larger scale and profitability. The P/B multiple of the acquisition is ~1.6x, diluting towards 1.3x when pricing-in upcoming capital increases.

The Grupo Security acquisition showed a P/B ratio closer to 1.2x, even though the bank had a larger scale and an even more efficient ROE (~12%), excluding current higher inflation effect, and a 2.8% market share. This leads them to believe the transaction should be relatively neutral on share price.

Funds Society and Open Door Media Team Up to Grow in the Americas Region

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Funds Society y la británica Open Door Media suman fuerzas en US Offshore, LatAm y Europa — Photo: Mattbuck. Funds Society and Open Door Media Team Up to Grow in the Americas Region

Funds Society and Open Door Media Publishing Ltd are delighted to announce an exclusive partnership. The two specialist media owners will work together to help asset managers with their marketing and distribution in Europe and Latin America.

Open Door Media Publishing Ltd (ODMP), publishers of InvestmentEurope, and Funds Society, publishers of the Funds Society website and newsletter, are delighted to be working together. Both InvestmentEurope and Funds Society are established, recognised brands amongst the communities that they serve.

Funds Society, based in Miami, owns the eponymous Funds Society brand www.fundssociety.com and targets those involved in fund selection in Latin America, Iberia and the US offshore market through its digital assets.

ODMP owns InvestmentEurope, a brand targeting those involved in the fund selection process, and serves this market with a monthly publication, app, daily newsletters and website www.investmenteurope.net. ODMP also organises events across Europe under the InvestmentEurope brand.

Looking ahead both groups will be working together across the media spectrum. Further details regarding events in Latin America and a publication will be announced in due course.

Elena Santiso & Alicia Jimenez, Executive Partners, from Funds Society commented: “We are delighted to team up with Open Door Media to offer our readers their proven expertise in the organisation of first class events for the investment community. Latin America and the US-Offshore market offer a thriving opportunity for asset managers looking to grow internationally. Our knowledge of the America’s offshore investment community combined with Open Door Media’s strong expertise working with international asset managers are key factors for the success of this new relationship”.

Nick Rapley & Louise Hanna, Founding Directors of Open Door Media Publishing Ltd, added: “Our business is to bring asset managers and their clients together wherever they are. Our partnership with Funds Society is hugely exciting and important insofar as this will allow us to create new events for asset managers to reach the investment community across Latin America and the US-Offshore market. Funds Society has a strong local presence and in-depth market knowledge which is invaluable to asset managers looking to grow in this region. We are thrilled to be working with them”.

Cyclical Drivers Remain Skewed Towards Greater US Dollar Strength

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Investec Asset Management presents its latest Multi-Asset Indicator. The main catch is a stronger dollar, and a positive economic and investment outlook, especially for equities.

Economic data from the US is consistent with above-trend growth. For now, the US Federal Reserve (Fed) continues to highlight slack in the labour market, but if employment growth continues at close to its recent pace, the Fed is likely to move forward the date of the first interest rate rise to the first half of 2015. This should support a stronger US dollar, which is beginning to perform well, especially given softer inflation in Europe and some disappointing Japanese data.

Second-quarter corporate earnings have, once again, beaten expectations and company management teams are no longer guiding analysts’ estimates downwards. A combination of expected earnings growth of roughly 10% for this year, even stronger earnings growth the following year and forecasts stabilising after long periods of relentless downward revisions, has contributed to the passage of time slowly reducing the market’s valuation. This makes further market gains likely in the remainder of the year.

The clearest trends in developed market sovereign debt remained in euro-zone bonds, with German Bunds, in particular, extending into strength. Further evidence of a loss of economic momentum across certain sectors, another lower-than-expected inflation print and on-going geopolitical concerns all encouraged this strength. In contrast, data in the US remained firm, although US long rates remained at the lower end of their multi-month ranges.

July could represent a watershed for global corporate credit markets. Spreads widened across both investment grade and high yield markets, with credit quality determining the extent of weakness. US markets led the sell-off, accompanied by outflows from high yield ETFs. The sell-off in credit assets during July has improved valuations.

Across all currency markets, the dominant force in July was the broad-based strength of the US dollar. The most resilient G10 currencies to this strength were sterling and the Japanese yen which were secondary beneficiaries of a reduction in global risk appetite. An aggressive extension of the appreciation of the US dollar is improbable in the near-term, although cyclical drivers remain skewed towards greater US dollar strength thereafter.

Overall, the inevitable never-ending sequence of geopolitical events in various corners of the globe does not detract from a positive economic and investment outlook, especially for equities.

You may access Investec Asset Management’s full Multi-Asset Indicator through this link.

U.S. Markets: A Curious Investing Conundrum

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El enigma de la economía americana: sube la bolsa, suben los bonos: ¿Hasta cuándo? — Wikimedia CommonsJames Swanson, Chief Investment Strategist at MFS. U.S. Markets: A Curious Investing Conundrum

According to James Swanson, Chief Investment Strategist at MFS Investments, we are experiencing an interesting combination in the US: “We have accelerating growth, rising profits and still, stable to falling interest rates”.

On the other hand, outside the US growth is faltering, especially in China, Japan, and recently, also in Europe.

Within this environment, James Swanson highlights that there are several signals supporting US Equities:

Rising revenues, profits and margins.
Capex has started to move up from relative low levels
Lending to financial companies and basic sectors is also begging to rise, something that hasn’t been seen for the last five years

In the attached video, James Swanson alerts investors to “be choosy, be diversified”, and to “focus on US large caps” which are doing very well, though “some support may be needed from slower outer markets”.

Schroders Announces New Hire to Strengthen Fixed Income Research

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Schroders has announced the appointment of Stephen Hunnisett, as EMEA Credit Analyst, to further strengthen its analytical capabilities in the Fixed Income Credit Research team.

Stephen joins Schroders from BlackRock where he was Head of European Financials Fundamental Credit Research. He is a European insurance industry expert with over 20 years of experience as an actuary, analyst and investor in the sector. Stephen will specialise in European fixed income providing Schroders with invaluable insights in this area.

Stephen joins the European Fixed Income team, headed by Patrick Vogel, with current assets under management, for clients around the world, of £10.5 billion¹. The eighteen-strong team is made up of nine analysts, together with a team of nine portfolio managers and quantitative strategists. Stephen’s appointment is part of an aim to grow the team in size over the coming months.

Philippe Lespinard, Co-Head of Fixed Income, said: “I am delighted to announce Stephen’s arrival which will continue to strengthen our analytical capabilities within the Fixed Income team. Stephen brings with him a wealth of knowledge within the European credit markets. This will boost our ability to identify attractive opportunities at a time when European fixed income markets look well supported.”

Patrick Vogel, Head of European Credit, commented: “Stephen is a highly regarded EMEA analyst with a wealth of experience in credit research. His knowledge will add further depth to our coverage of the European financials and insurance sector, as we continue to grow our team.”

¹Source: Schroders, as at 30^th June 2014

Tanzania: The Difficult Task to Open up the Capital Market

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In late July 2014 Global Evolution visited Tanzania as part of an East Africa trip. During the trip they met with Central Bank officials, Ministry of Finance officials, local banks and pension funds, IMF and independent consultants. A summary of the investment notes from this trip follow.

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The difficult task to open up the capital market

We currently see the monetary framework as the weak link in the Tanzanian economy as the monetary policy seems caught in a transitory phase as it migrates from a monetary aggregate targeting regime to an interest rate regime. This is expected to strengthen the relationship between the yields on T-bills/T-notes and the interbank rate. Under the current monetary framework the central bank is extremely focused on the quantity of reserves and set up levels for expected future reserve levels.

In the light of this intense focus on reserve accumulation and management of hard currency flows the deregulation of Tanzania’s capital account will be interesting to follow. Today, in order to protect the Tanzanian Shilling from hot money/speculative investors, foreign investors are not allowed to buy local financial assets. However, according to plans this will gradually change. From September 1, 2014 investors from the East African Community (EAC) will be allowed to invest in Tanzanian fixed income while other investors from the rest of the world are not expected to get access before 2016. We clearly had the feeling that several amendments will have to be made to the current regulatory framework that has strict restrictions attached. EAC investors will be the first to test these restrictions;

A maximum 40% of a bond series can be purchased by non-residents while the level for equities will be 60%
In primary bond auctions foreigners cannot buy tenors  shorter than 1yr
Foreign investors are obliged to hold a position for 1  year as a minimum unless sold to another non-resident investor

We find the above restrictions very unappealing for foreign investors as you basically will have to lock up your position with little chance of being able to sell for 1 year. The central bank sees the current regulatory framework and the restrictions as a way to protect the shilling from huge swings in the capital account. Still, we think the worry is overdone. If capital markets were genuinely opened we believe that capital market dynamics automatically would adjust. In fact, we rarely see huge moves in the capital account in other frontier countries and – if opened – Tanzania would likely be rewarded for pursuing prudent fiscal and monetary if so deserved.  Like the rest of East Africa Tanzania suffered from drought in 2011. This caused inflation to spiral and the shilling to weaken. However, contrary to Kenya and Uganda that significantly raised policy rates and attracted portfolio flows that helped stabilize currencies and slow inflation, Tanzania continues to struggle with the aftermath of the 2011 drought. Today’s elevated level of real yields (5yr bonds around 15% with inflation at 6.4%) seems to be the only feasible solution for the central bank to support the currency while running a substantial current account deficit (since 2011 the CAD has ranged between 12.4% and 16.9% of GDP).

Oil and gas potential

In 2013 GDP growth was 6.9% expected to accelerate to 7.1% in 2014 led by services, construction and manufacturing. Tanzania has been able to generate impressive growth rates over the past decade and keeping promising gas discoveries in mind nothing suggest that growth will slow in the foreseeable future. Tanzanian gas reserves are estimated at 35tn cubic feet according to recent reports and exploration is ongoing. Today several major energy companies are involved in Tanzania. Generally speaking, the government faces some tough decisions on how to capitalize on the gas potential. Should the state profit only from production sharing, revenue agreements, royalties and general corporate income tax or simply enter as a strategic investor? Often the last option is preferred by governments as a way to obtain more control with exploration but we tend to disagree. In Tanzania gas exploration and development costs are estimated to as much as USD 20- 40bn over the coming years and if the government decide to become a strategic investor (let’s assume a 10-15% share), the government’s financing needs and debt stock will increase. Instead the government could opt for royalties and corporate taxation only.

Investment Strategy

Going forward, we expect interest rates to drift lower as the Bank of Tanzania seems to be in a good position to ease. In our opinion this should lead to a bull flattening of the local yield curve. Unfortunately foreign investors cannot get access yet so we are basically left on the sideline. As to the opening of the capital account for EAC investors starting September 1 we sensed a rather muted excitement not least from professional investors in Nairobi. Still, if Tanzania succeeds to attract EAC investors we think the current regulation will create a segmentation of the market that could see 40% of outstanding debt trading offshore in Nairobi and the remaining 60% trading domestically in Tanzania.

From an exchange rate perspective we believe the shilling will continue to depreciate modestly thereby keeping REER unchanged. There is a chance though that the opening of the capital account can attract sufficient inflow to strengthen the shilling but as mentioned above inflows are likely to be modest in our opinion. Furthermore, more recently forward rates have collapsed so we do not see much scope for investment opportunities in the offshore forward market. This leaves the potential launch of a Eurobond as the most promising investment opportunity.

Global Evolution, an asset management firm specialized in emerging and frontier markets debt, is represented by Capital Stragtegies in the Americas Region.

You may access the full report through the attached pdf file.

Corporate Credit Strong Excess Returns Are Over, But It’s Still the Best Opportunity in Fixed Income

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Risk assets struggled in July as the MSCI World index produced a dollar total return of -1.6%. Global geopolitical concerns weighed on sentiment in equity markets, reflecting the ongoing crises in Ukraine and Gaza, while a stronger-than-expected US Q2 GDP print (4% annualized, well ahead of expectations) raised fears that the US Federal Reserve could be forced to raise US interest rates sooner than is currently anticipated by markets. In Europe, idiosyncratic risks came to the fore as shares in Banco Espirito Santo were suspended due to accounting irregularities in some of its holding companies. In contrast to the weaker tone in developed equity markets, emerging market equities (excluding Russia) generally had a positive month, with the MSCI Emerging Markets index up 2.0% in dollar terms. Signs of economic growth stabilization in China helped to lift emerging market equities, as second quarter Chinese GDP growth came in at 7.5% year on year, in line with the government’s overall 2014 growth target.

In bond markets, 10-year US Treasury yields moved higher in July, ending the month at 2.56%, having finished June at 2.53%. However, 10-year bund yields moved lower as some weaker-than-expected sentiment surveys and a below-consensus reading for the harmonized index of European consumer prices for July stoked deflation concerns. In broad terms, emerging market debt was resilient as the JP Morgan EMBI+ posted a dollar total return of 0.07%, but Russian debt performed very poorly as EU ambassadors approved upgraded sanctions towards the end of the month following the Malaysia Airlines tragedy in Ukraine, which has been attributed to Russian-backed separatists.

In terms of our current positioning in our asset allocation model, we continue to dislike core government bonds as we see better opportunities in corporate credit. However, we would highlight that the period of strong excess returns from credit is over and therefore we expect returns this year to be driven by the coupon. High yield had a difficult month in July following Janet Yellen’s comments that lending standards for leveraged loans and some lower-rated corporate issuers had deteriorated. Absent a decline in credit quality, the recent weakness in high yield could be seen as a buying opportunity, and will certainly provide fixed-income-only investors with food for thought, but we are not inclined to add to our exposure in our multi-asset portfolios.

As well as favoring credit, we remain overweight equities (via the UK and Japan) and property. UK equities can no longer be regarded as cheap, but an attractive dividend yield continues to provide support. Moreover, the UK remains an attractive destination for global companies to deploy their surplus cash and we expect M&A activity to continue given that many businesses are reluctant to commit to investment capex. One potential headwind for the UK is political risk, with the Scottish independence vote looming and a general election due in 2015. In Japan, valuations are attractive relative to other developed equity markets and recent evidence suggests that the increase in the sales tax is not creating a major headwind for Japanese corporates. A recent research visit to Japan by our global equities team indicated that the Bank of Japan is relaxed about the impact of the sales tax. Commercial property values in the UK continue to recover and gain support from the lack of new development post the 2008 financial crisis, which has left supply constrained in a number of areas. Perhaps more importantly, the high real yield available from commercial property remains attractive in an environment where bond yields are very low by historic standards.

Opinion columns by Mark Burgess, CIO at Threadneedle Investments.