“We are going to see a global economy that on the whole is still struggling with growth sitting not too far away from the weak 3% level,” Anderson said in a media briefing last week.
Developed economies are seeing slowing productivity and a pausing in globalisation, according to Anderson. Trade before the global financial crisis was growing at around 6.7% per annum, and it has now slowed down to 3% per year.
In addition, the potential policy changes from the US will make a disturbing picture around globalisation, he said. Nevertheless, he believes the 3% growth level will still continue, noting that it is still early to tell whether or not the proposed policies in the US will be enacted.
Overweight US equities; underweight EU, Japan
Overall, Anderson is overweight US equities and US large cap.
“US equities will remain defensive in the face of global shocks,” he said, adding that the asset class was not much affected by the devaluation of the renminbi and the volatility caused by the Brexit vote this year.
Anderson advises investors to move away from some of the defensive sectors that have seen significant momentum over the last several years and instead focus on those that provide greater value.
For example, Anderson is moving away from consumer staples and consumer discretionary and is pivoting towards undervalued sectors such as healthcare and technology.
Earnings per share for technology is significantly higher than consumer staples, but consumer staples have higher forward price-to-earnings ratios.
“Healthcare and technology are sectors that have strong price to operating cash flow and have more favourable price-to-earnings ratios,” he said.
Anderson is also looking at financials, as the expected rising interest rate environment in the US could boost interest margins.
On the flipside, the macro backdrop has prompted Anderson to have an underweight position in non-US developed market equities, particularly Europe and Japan.
“We see continued problems in Europe and the economic story is not getting any better with the lack of structural reforms.”
Greater fragility is seen in the Eurozone, with a number of elections taking place next year, he added.
He does not see value in European equities “en masse”, although noted that there are a number that may offer good value.
In addition, monetary policies in Europe and Japan are reaching their limits.
For example, the negative interest rates in Japan have created significant unintended consequences to the country’s financial system, while the Eurozone also has no further to go in terms of monetary policy, although quantitative easing is beginning to taper off, he said.
“It is likely that [the proposed] fiscal policy [in the US] is going to come into our favour as a means to support economic growth.”
Neutral in EM equities
Anderson is currently neutral on emerging markets overall having moved from a significant underweight in early 2016.
Anderson expects a pick up in emerging market growth from 3.8% this year to just over 4.1% in the following year, but acknowledged that it is still relatively close to the growth in developed markets.
“Brazil and Russia have emerged from their recession,” he said. In addition, China will also support the growth in emerging markets.
He favours emerging market small caps that are focused towards domestic markets, rather than those companies that are subject to the headwinds of trade negotiations.
“India would be a favourite market,” he said. “One of the things that we think that is very important in the continued success of emerging markets is the pursuit and execution of structural and policy reforms.”
Although the demonetisation in India has caused a negative blip in the Indian economy in the short-term, it will create significant potential for further growth in the economy, especially with the introduction of the goods and services tax next year.
US and EM fixed income
In terms of fixed income, Anderson is overweight US credit, while underweight in developed market treasuries, such as US treasuries. He is also reducing his exposure in the long end of the curve, he said.
However, he cautions investors to remain in the higher rated sectors of high yield bonds.
“The credit cycle in the US is beginning to reach a very mature cycle. The rise of defaults amongst lower rated credits is increasing, so the sweet spot in high yield is likely to be the higher rated end of that high yield market,” he said.
He is selective, meanwhile, with emerging market debt. He favours those bond markets that are very well supported by local investors.
He noted, however, that individual investors may have a difficult time investing in emerging market debt and would typically use a fund manager. Unfortunately, there has been a trend in active emerging market debt managers to underperform, he said.
