US Federal Reserve chairman Ben Bernanke's suggestion in May that the pace of quantitative easing (QE) could be reduced, with no new purchases after mid-2014, immediately hit financial markets. But while we are cautious, we believe that any US interest-rate hikes remain a long way off in 2015 or even 2016. The withdrawal of QE may affect the global growth cycle, and hence company sales and profits. This, coupled with modest economic growth, may warrant investor caution. Yet opportunities remain, and we think equities will continue to offer value over the long term.
We like Roche (VX: ROG), a research-focused pharmaceutical company. Roche discovers, develops and provides diagnostic and therapeutic products and services. Although Swiss-listed, a third of its revenues are generated in America. Its strong balance sheet and significant free cash flow enable it to invest in the research and development of new drugs, but also return capital to shareholders.
On the fixed-income side, volatility has risen since May. Investor confidence relied heavily on the liquidity provided by the Fed, so Bernanke's comments hit sentiment hard, and global fixed-income assets have re-priced significantly. Emerging market bonds in particular, which are generally treated as more risky when investors start to get nervous, saw considerable outflows. But individual markets can still offer opportunities.
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There are many attractions to Asian and emerging markets. They have healthy public finances, favourable demographics and dynamic economies. Having reformed their economies following the crises of the late 1990s and early 2000s, they entered the 2007/2008 crisis in better health, enabling them to weather the storm. We continue to favour Mexican fixed-income assets. Mexico's economy is benefiting from having cheaper wage costs than its export rivals. This isallowing it to grow its share of the American export market at the expense of China and Canada.
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Infrastructure assets also continue to attract investors because of their ability to deliver steady cash flows while offering strong inflation-hedging benefits. The returns are also more attractive than those available on bonds. The investable universe should increase as developed economies are forced to replace ageing infrastructure, and emerging markets continue to develop new infrastructure. So we are confident of the sector's long-term potential.
Its simplicity also works in its favour. The financial crisis has caused many investors to shy away from more complex financial products. So it's easy to see why infrastructure with its tangible nature appeals. Increased popularity, however, means investors need to pay attention to infrastructure asset valuations and the premiums they demand. The funds we like are HICL Infrastructure (LSE: HICL), Greencoat UK Wind (LSE: UKW), 3i (LSE: 3IN) and John Laing Infrastructure Fund (LSE: JLIF).
There are risks on the horizon. Central bank liquidity remains a key support for global risk assets, and therefore the actions of major central banks will continue to drive markets. Nevertheless, valuations remain supportive and there are still many opportunities for investors.
