The Purchasing Managers Index numbers in the 18-member euro zone were disappointing but were equally consistent with an annual growth forecast of about 1.5 percent, which, if achieved, would be great in what has been witnessed in the euro land generally, said James Bevan, Chief Investment Officer at CCLA Investment Management.
It is likely that the euro-area will witness a sustained pick-up in growth in the second half of the year, and it’s absolutely safe to say a second-quarter bad news is now “baked in the cake” and acceleration is on the curve, he added.
Asked why his portfolio is overweight on equities and underweight on fixed-income, James said investors need to understand first why fixed income has done so well this year. Growth in the currency-bloc has been disappointing in the first quarter and they are likely to be disappointing again in the second quarter. The real issue, however, is whether yields in the bond market are below the rates of inflation. On that basis investors are simply burning money by staying in the fixed-income asset class.
There’s no denying that there are deflation risks to the global economy, which means cash rates will stay relatively low. However, the real returns (from fixed-income) are absolutely out-gravitating the equity markets where free cash flows are simply extravagant, he noted.
Asked what action markets could expect from the European Central Bank to stave off deflation when policymakers meet in June, James said the minimum markets could expect is yet more talk from ECB President Mario Draghi. He has been the master of making statements and not actually flipping a coin. However, this time around there is likely to be a more concerted program of cutting money rates and the possible onset of quantitative easing, he observed.
Asked if yields could go down further in the peripheral countries following the ratings upgrade of Spain by Standard & Poor, James said yields are unsustainably low now and they are certainly expected to rise. Italian equities in particular could witness significant upside as the current low levels indicate better buying opportunities, he argued.
Asked how investors should rotate their portfolios in the US as the Federal Reserve slowly moves toward a tighter monetary policy, James said solid growth companies in the US have been pushed to unsustainably high valuations due to too much market participation in good names. Investors should look at companies that have real long-term growth potentials and which, on the basis of projected free cash flows, are selling cheap. Google is one such stock that investors should consider adding to their portfolios, he concluded.
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