2015 updated regional exposure forecasts according to Russell’s investment strategists:
- Asia-Pacific – warming to regional equity markets but not yet overweight: Broadly neutral on equity markets in this region which is “tracing out a somewhat downbeat economic growth path” according to the report. That said, the team is warming to Asia-Pacific regional equity markets as prices fall and then settle at lower levels, but are not yet overweight on the region as a whole.
- North America – expensive valuations to offset favourable macro backdrop: Continued modest underweight for US equities given relatively expensive valuations which offset a modestly favourable macro backdrop.
- Eurozone – reduced position on core government bonds to neutral: The team has maintained an overweight position to eurozone equities and peripheral bonds, while going neutral on core government bonds.
- Emerging Markets – more time to pass before weaker EM currencies and cuts gain traction The team is underweight emerging markets given cyclical weakness in China and believes more time needs to pass before weaker emerging market currencies as well as widespread cuts to official interest rates gain traction and efficacy.
- Currency – QE programmes to be catalyst for US dollar strength: Outlook for the US dollar and pound sterling remains favourable, but less so that at the beginning of 2015. But an increase in the QE programmes in Japan and the eurozone will most likely be a catalyst for a renewed period of US dollar strength.
- Fixed Income – neutral on core eurozone government bonds after Q3 rally: S. government bonds are considered expensive and the team is underweight, while across the Atlantic, core government Eeurozone bonds have gone back to neutral after a third-quarter 2015 rally, but the team is maintaining an overweight position to peripheral eurozone bonds.
The report also includes the perspectives of Russell Investments’ strategists according to their “cycle, value, sentiment” investment strategy process:
- Business Cycle: Strongest in Europe
The US cycle has been downgraded to moderately positive in light of modest earnings per share (EPS) growth prospects and the anticipated Fed tightening. Japan continues to be favourable since EPS growth is relatively strong and there is potential for Bank of Japan policy support. However, the strongest cycle view is for Europe with EPS growth supported by the tailwinds of euro depreciation, credit growth and less fiscal austerity, along with the European Central Bank’s quantitative easing (QE). The cycle is still negative for emerging markets amidst U.S. dollar strength, falling commodity prices and the economic slowdown in China.
- Valuation: US equities still very pricy
The US market remains the most expensive among major developed markets with both Japanese and European equities viewed as moderately expensive. However, emerging market equities are still considered moderately cheap.
- Sentiment: Momentum weakness in UK and emerging markets
Momentum is now neutral across most equity markets and negative for the UK and emerging markets. Following the declines in August and early September the contrarian indicator suggesting most markets are oversold.