Facing a tougher economic climate in the second half year, investors should focus on equities markets in Japan and Europe, especially the UK, while investing in high-quality growth stocks with low risk, Merrill Lynch Investment Managers said yesterday.
"Valuation should top the priority list [for selecting stocks] while European stocks are more attractive than US ones," said Richard Turnill, London-based head of asset allocation and economics at Merrill Lynch, as he presented his global investment outlook in Taipei.
Prior to joining Merrill Lynch, Turnill worked as an economic advisor to the Bank of England's international division.
Turnill said the US Federal Reserve, which decided to increase interest rates by 25 basis points on June 30, is expected to continue to raise interest rates to 2 percent by year's end and to 2.5 percent within the next 12 months.
With global economic momentum slowing, interest rates rising and an expected slowdown in corporate earning growth in the second half year, investors might begin to turn their attention to other developed markets which have sustainable growth, he said.
"Japan and the UK are where most of the more obvious opportunities lie, but investors should never underestimate a recovering Europe," Turnill said.
Economic recovery in the Europe is better than expected while that in the US -- with an annualized 4 percent of GDP -- is slightly disappointing in light of a high market expectation, he added.
According to the firm, economic performance in both Japan and the UK exceeds market expectations, with good business fundamentals and business confidence.
"Japanese and US valuation have converged for the first time in many decades," Turnill said. Japanese small caps, which are reasonably priced, are attractive since they are benefiting from the domestic recovery, he said.
Furthermore, UK companies, which often are global leaders in their fields, are also attractively valued compared to their US competitors, with a 30 percent valuation gap on the basis of this year's earnings, he said.
Turnill said he expects a slowdown in Asian markets in the second half following China's credit-tightening measures. But he lauded the development in China as positive in sustaining future economic expansion in the region, where its long-term potential is great, saying it's never a threat.
Even though equities are still priced for higher returns than bonds, Turnill advised bond investors to go for short duration bonds, such as two-year yield assets sold aggressively in the US, and selected credit.
While advising investors to select high-quality, or cash-generated stocks within each sector, he said that the global technology sector's valuations have returned to extremes with the information-technology sector being highly over-priced, which can only be sustained if its earning growth remain to more than double over the next five years.
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