Every major economy in the world is dealing with domestic issues as well as global problems such as supply chain hold-ups pushing up inflation across the globe. This has made it a difficult time for investors to know where to put their money.
The US, which has been the best performing region over the past decade, has taken a downward turn in recent months as sentiment shifts away from growth and into value, with the Nasdaq 100 index down 20.7% since the start of the year.
It’s not easy to find a better alternative elsewhere – the UK is still experiencing issues related to Brexit, volatility in Europe has increased massively as a result of the war in Ukraine, and strict policymaking in China has made the nation less investible.
This is bound to leave many wondering where to park their cash for both the short and long term, with both outlooks looking increasingly unpredictable.
Here, Trustnet asks global fund managers which regions they believe to be the safest bet for investors to put their savings.
Total return of indices since the start of the year
Source: FE Analytics
Japan
Many central banks have been pushing up interest rates as they brace for a period of rapidly rising inflation.
The Bank of England (BoE) and Federal Reserve (Fed) have already increased rates to 1% so far as the cost of living in each country has reached the highest level in at least thirty years.
Inflation has climbed to 7.8% in the UK and 8.3% in the States but Alex Tedder, manager of the Schroder Global Equity fund, pointed out that Japan has kept rates comparatively low, at 2.5%.
Japan has spent most of the past three decades in an environment of declining inflation, so “companies appear reluctant to pass through cost increases domestically” now that rates are back in the positive, according to Tedder.
He added that the risk of wage push inflation is also lower in the region because Japanese workers are “used to subdued prices and are not demanding aggressive wage increases”.
Likewise, the Central Bank of Japan’s (CBJ) choice to keep interest rates low has weakened the Yen, which Jeremy Podger, manager of the Fidelity Global Special Situations fund, said was an attractive quality in the market.
Although Tedder also saw the benefit of a depreciating currency, he was somewhat wary of how the CBJ’s strategy can manifest itself, stating: “It remains to be seen whether this policy will be successful, but the discrepancy with other developed economies is notable.”
China is in a similar situation – whilst the rest of the world seems to be tightening their monetary policies, it is in the process of easing the pressure.
Although this seems appealing, Podger said that he will “not be leaping into the Chinese equity market” but could anticipate Japan receiving “potential benefits from any uptick in Chinese activities”.
US
Although many of the large-cap US tech stocks that led global markets over the past decade have gone into decline this year, James Thomson, manager of the Rathbone Global Opportunities fund, said that his “key position remains the US because that’s where the growth is”.
There is not a huge correlation between economic growth and revenue growth in large-cap companies, according to Thompson, meaning that opportunities arise for growth investors during time of uncertainty.
Even though economic concerns are driving investors away from growth companies and dragging down their share prices, he said that the revenues being recorded by these businesses are still strong.
This is especially relevant to large-cap companies which are “resilient and much less sensitive to changes in economic growth” but are still being priced down by declining investor sentiment.
Thompson added: “If inflation and rate expectations start to ease, many of these quality growth businesses will be a coiled spring.”
UK
Richard Scrope, manager of the Tyndall Global Select fund, agreed that the cash flows of large technology companies are better protected against inflationary pressures, adding that smaller companies will remain under heightened pressure.
The reoccurring revenues and business models of these smaller scale tech companies will be tested in this uncertain environment and are most at risk of failing under the added stress.
Additionally, consumer discretionary companies will also be some of the worst effected as high inflation dries up the pool of cash being spent on their goods and services, while staples will fare much better.
The UK has a high exposure to consumer staples and low allocation to both discretionary and technology companies, placing it in a “better positioned than its European or American peers”.
Some might argue that the dominance of well-established sectors such as financials and commodities place it in a secure position moving forward, with ‘old economy’ companies offering stability as uncertainty grasps other markets.
Scope added that “the valuation discount remains attractive” in UK equities, as the knock-on effects of Brexit and Covid drag down share prices.