"It's going to be more difficult to take money over the next two to three years"

Mark McFarland of Coutts & Co talks about his mid-year investment outlook

Soumik Kar

How would you summarise the global financial market at this point in time?

European, Chinese and Japanese markets have done very well. The US market, too, has been faring well despite being expensive. Emerging markets have also done well particularly because of good investment return from coupons and sovereigns. Even Russian equities have done well despite the constant volatility in that market. However, India has been a laggard with MSCI India Index up 3.1% YTD and fixed income investors, too, have had a difficult year. We continue to be overweight European equities. With the downside risk being contained we expect Europe’s growth recovery to support corporate earnings. 

The next six months  — Hedge risk, look for value 

What is your view on Greece as its citizens have rejected the bailout package?

It was surprising to see such a large majority going for the ‘no’ vote and also that the market reaction remained quiet mild. The result of the referendum has left most of the people in limbo. The European commission and the ECB will meet to discuss the referendum result. It’s quiet likely that they will support Greece but not like before. I think now Greece's bargaining power has reduced. They have two weeks to negotiate with the creditors before the repayment. It’s a difficult time for Greece. The result of negotiation will further determine what exactly lies ahead for their country. 

Indian bond yields are likely to drift lower by year-end 

What effect will it have on the markets?

The size of Greece’s economy is too small to create any significant effect. However, it will be foolish to say that there wouldn’t be any impact on the market. For example, we saw an immediate 1.5% drop in the S&P 500 index when the news broke. But having said that, the impact on markets won’t be too severe. Also, the Asia Pacific markets won’t be affected as much as those of Europe and North America.

What trends do you think will emerge in the second half of this year?

One of the major concerns of the market lately has been the Greek crisis. The concern over whether Greece will leave the Euro zone has led to short term weakness. Apart from that, there are two major trends that are emerging at the moment. The banking sector is seeing a recovery in developed markets. They have started lending in Europe, Japan and America, which is a good sign. This in turn is also benefitting the real estate market in Europe and Japan. 

In emerging markets, however, the picture is really complicated because they rely extensively on global trade and that has not recovered. This is the major reason emerging markets have underperformed. We are expecting global trade to hit the recovery cycle but at the moment it looks very soft. The major factor that has upset global trade is the slowdown in the Chinese economy. China, as we know, is a big supplier as well as a huge consumer market. When the Chinese economy turns and starts to recover we should see an improvement in global trade. 

Which is the best equity market to bet on right now according to you and what should one look out for?

I think it’s going to be more difficult to make money over the next two to three years. This is because a lot of markets have already priced in good return. So, our focus is on trying to find areas where there is more upside because asset prices are lower than they should be. For example, we like Russia because it’s very cheap and its currency has fallen a long way down. I think banks and energy stocks are also being ignored at the moment because the risk perception for those is higher. 

Is the year old Modi government losing its charm?

Energy prices are bottoming out as crude has become range bound at $55-65 per barrel. It serves as a good buy on dip opportunity for companies with good operating efficiencies. Also, you are getting yields on equity around 5%. Another sector that I’ll suggest is banks. On a global basis banks are cheap. For example if we look at United States banks, a lot of them have seen their valuation pushed down to cheap levels because of litigation. Even European and Japanese banks are looking cheap.  We also try to find assets which are not looked upon favourably or which aren’t very well understood or are genuinely underpriced because of the perception of a big economic slowdown. 

Do you expect a positive spillover on the Asia Pacific markets from the ongoing recovery in the US?  

It already has had a huge impact. What we now have is the potential for US rates to go up and an even more strong economy in 2016. As long as the interest rate goes up by a small margin, that’s actually good for emerging markets. We can see some currency management issues in emerging markets where you need to think about hedging currency risks but, in terms of growth profile, we should start to see things improve.

Coming to specific asset classes, are you only batting for stocks or also looking at bonds?

We favour stocks as you get a gradual increase in equity prices. Also, global growth is recovering so it’s good to invest in stocks. The fixed income market is expensive. If you are going to invest in bonds you need to find the right asset to compensate for the risk. Just buying US treasury is a bad investment right now. We do prefer equities but only just.  

European equities are cheaper than the US

What is your market outlook six months out?

Our view is that global growth is going to be quite strong, driven particularly by the US and Europe. Both the markets are recovering and that paints a good picture. In fact, the cost of capital in the US is going to go up very slowly. We can expect a 75 basis points rise by the end of 2016. In terms of equities, even as the US appears expensive, prospects look positive in Europe and large emerging markets. While equities in China will remain cheap, policy reforms in India will make it favourable for long-term investment. In the coming six months, we suggest that the investors rotate money in India and emerging markets fixed income. Investment in high yield bonds can be considered by informed investors.  

What should investors be cautious of and what opportunities shouldn’t be missed?

The biggest challenge is not to buy something that is very expensive. It is advisable to not even buy US equities. In terms of opportunities, when growth recovers it is best to invest in emerging market equities as they are comparatively cheaper. Infrastructure is a great long-term investment in Asia. Globally, $57 trillion needs to be invested by 2030. Also it has got a nice dividend yield and protection against inflation. So, I think infrastructure is a good sector for investment. Other opportunity for investors is the education sector. It has tremendous potential in China, India and other emerging markets.