In its February Global Outlook, Standard Life Investments head of global strategy Andrew Milligan said market conditions are ripe for a year of “soggy – and volatile – market returns”.
“Investors must resist the natural temptation to chase returns; careful portfolio construction becomes ever more paramount,” Mr Milligan said.
Mr Milligan said the firm’s house view is to place a continued focus on relative value investments.
“In a volatile environment, relative value investing – when done well – pairs off two risks and uses their correlation to mitigate volatility,” he said.
“In terms of our portfolio asset allocation, we are running modest-to-low levels of risk, but with strong tilts in selected asset classes and regions.”
Mr Milligan said the firm has moved up its capital structure to invest in credit over equities. The firm has modest-to-low levels of equity exposure, favouring Europe and Japan over the US and emerging markets.
“We have a modest preference for Japanese equities, not only for economic reasons – but also because equity valuations are more attractive and there is a stronger behavioural support from corporate governance reforms,” he said.
“Unlike bourses across the world, Japanese stocks are cheap; both on an historic and absolute basis.”
However, Mr Milligan said if the global economy does not prove to be mid-to-late cycle, or if the cycles converge, the investment firm would reconsider its current portfolio allocations.
“If the US economy re-accelerated and the [US Federal Reserve] were modestly behind the curve, then equities would likely rally substantially—requiring a more pro-equity tilt to the portfolio.”
He said that this, however, is unlikely and the house view remains positioned defensively for what is set to be a challenging year.
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