03 May 2018
A decade after the global financial crisis (GFC) threatened a return to the Great Depression of the 1930s, we believe that the global economy is finally on the mend. We anticipate growth should approach four per cent in 2018, the strongest pace since 2011 as the economic recovery gains strength around the world. That means the withdrawal of the extraordinary medicine administered by major central banks since the onset of the GFC will gather pace. The US Federal Reserve should lead the way with further rate hikes, and other central banks are also likely to move towards tighter, rather than looser policy.
The scale of the monetary firepower deployed by global central banks over the past 10 years is truly breathtaking. Altogether around $10 trillion has been pumped into financial markets, equivalent to almost four times the size of the UK’s economy in 20161. As a result, the Bank of Japan now owns 71 per cent of its local Exchange Traded Funds’ market and over 40 per cent of local government bonds2&3. Meanwhile, the Bank of England holds around £435 billion of UK government bonds, or around 28 percent of all gilts outstanding4.
Without these measures the global economy could have entered a slump to rival the Great Depression. But the sheer weight of the wall of money that has crashed into financial markets has also increased the price of financial assets. Stocks and bonds around the world have soared in value. Moreover, investors seeking yields have been forced into riskier and riskier parts of the market. So as the price of government bonds rose, investors moved into investment grade corporate bonds. When those too rose in value, high yield bonds became a target. When they became expensive, investors sought out equities. In effect the rising tide of quantative easing floated all boats, with financial assets rising in value almost irrespective of their individual merits or risk profile.
This turning point in monetary policy will have significant implications for investors. We don’t believe markets will sell off but we do think that investors will have to become much more discerning about which assets they buy. They will have to focus on the fundamental drivers of an asset price rather than simply relying on a flood of central bank money to lift asset prices higher. So factors, such as the outlook for inflation, interest rates, corporate earnings, or the quality of a company’s management, will once again become crucial in determining whether a stock or bond offers good value. Investors will have to take care over which assets they are exposed to, as well as which geographical regions, sectors and individual stocks they choose to invest in.
There are signs that this is already happening. The correlation between stocks within equity indices declined sharply in 2017, consistent with company fundamentals driving returns, rather than central bank policies.
This return to the “normal” rules of investing should create fertile ground for the Aviva Investors’ range of Multi-asset funds (MAF). We can exploit the insights provided by our economists and analysts in looking to determine which assets, regions, sectors and stocks are best placed to perform strongly in this new environment, and which to avoid.
To give an example, we currently favour European equities, which have underperformed global markets in recent years but should now benefit from the euro-zone’s improving economic outlook. Moreover, within Europe we have identified banks as promising the best prospects. They offer good value and are likely to benefit disproportionately from a pick up in economic growth in the region. But rather than simply investing directly in European banking stocks, we have bought instruments called futures, which allow us to profit from an increase in the share price of European banks. Futures are, however, less costly than buying shares.
So investors in MAF benefit not just from our ability to determine which region of the globe offers the best prospects, but also which sector could do best in that region, as well as our expertise in gaining exposure in a way that aims to maximise returns.
1 Yardeni Research: Global Economic Briefing: Central Bank Balance Sheets, August 2017
https://www.yardeni.com/pub/peacockfedecbassets.pdf
2 Bloomberg, 19 July 2017: Japan's Central Bank Is Distorting the Market, Bourse Chief Says
3 Reuters, July 7 2017: Bank of Japan offers to buy unlimited amount of bonds to calm markets
http://www.reuters.com/article/us-japan-bonds-idUSKBN19S0YI
4 Aviva Investors’ estimate, based on data from the Bank of England and UK Debt Management Office
https://www.bankofengland.co.uk/markets/quantitative-easing-and-the-asset-purchase-facility
http://www.dmo.gov.uk/data/pdfdatareport?reportCode=D1A
KEY RISKS
Past performance is not a guide to future returns.
The value of an investment and any income from it can go down as well as up and can fluctuate in response to changes in currency and exchange rates. Investors may not get back the original amount invested.
These funds use derivatives; these can be complex and highly volatile. This means in unusual market conditions the Fund may suffer significant losses.
These funds invest in emerging markets, these markets may be volatile and carry higher risk than developed markets.
Investors’ attention is drawn to the specific risk factors set out in the fund’s share class key investor information document (“KIID”) and Prospectus. Investors should read these before investing.
Important Information
For financial advisers only. This commentary is not an investment recommendation and should not be viewed as such. Except where stated as otherwise, the source of all information is Aviva Investors as at 31 December 2017. Unless stated otherwise any opinions expressed are those of Aviva Investors. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature.
Portfolio holdings are subject to change at any time without notice and information about specific securities should not be construed as a recommendation to buy or sell any securities.
The Aviva Investors Multi‐asset Fund range comprises the Aviva Investors Multi‐asset Fund I (“MAF
I”), the Aviva Investors Multi‐asset Fund II (“MAF II”), the Aviva Investors Multi‐asset Fund III (“MAF
III”), the Aviva Investors Multi‐asset Fund IV (“MAF IV”) and the Aviva Investors Multi-asset Fund V
(“MAF V”) (together the “Funds”). The Funds are sub‐funds of the Aviva Investors Portfolio Funds
ICVC. For further information please read the latest Key Investor Information Document and
Supplementary Information Document. Copies of these documents and the Prospectus are available
to download in English from our document library on avivainvestors.com.
Issued by Aviva Investors UK Fund Services Limited, the Authorised Fund Manager. Registered in England No 1973412. Authorised and regulated by the Financial Conduct Authority. Firm Reference No 119310. Registered address: St Helen’s, 1 Undershaft, London, EC3P 3DQ. An Aviva company.
CI064231 01/2018