Every week, a professional investor tells MoneyWeek where he’d put his money now. This week: Thomas Becket, Global Equity Strategist, PSigma Investment Management
Opinions on the outlook for global equity markets are currently polarised. On one side are the optimists who believe the bull run will continue. On the other are the pessimists who have already started to rein in equity positions and are looking to make their portfolios even less risky. I am somewhere in the middle of these two views, but am maintaining a pro-equity stance.
The outlook for equities
The global economy will grow by around 5% this year – less than last year, but still healthy. At a micro-economic level, I was very pleased with the latest corporate results season, particularly the ability of US and European groups to drive their profits from operations in emerging nations. Substantial share buyback schemes and dividend hikes were announced, showing the general confidence of companies.
Also, as companies are awash with cash, with debt remaining cheap and private-equity firms raising enormous sums of money, we see no quick end to the mergers and acquisitions fever gripping the market. But alongside these positives, the US economy is visibly slowing and there seems no end to the housing woes. Imbalances are also building within the global economy and profit-taking might set in after a good run. Should stocks fall back strongly, I would see it as a buying opportunity.
Eight of the best equity funds
Within the broadly positive macro-economic environment, I see a resurgent Europe and the re-emerging Far East as stand-out investment opportunities. My current core conviction play is Europe. Eurozone growth in 2007 is likely to be the strongest we have seen this century and other economic indicators are equally positive. There is also the potential for long-overdue structural reform within ‘Old’ Europe. European companies are at an earlier stage in the profit cycle and have more fat to lose than their US peers. I have chosen the large-cap focused MFS Continental European and the Gartmore European Selected Opportunities funds as core investments. I am particularly keen on Germany, where both funds have an overweight stance. Both have excellent long-term track records and have outperformed when tested by tougher market conditions.
Although I expect market volatility to build in Far Eastern markets after tremendous runs, I am still keen on investments in this area, as I believe the long-term investment case remains intact. I currently invest in the Allianz RCM TR Asian Equity fund and First State Asia Pacific Leaders, both of which have an overweight stance on Greater China and South-East Asia. Although the funds are managed with a significant emphasis on risk and are positioned to outperform in troubled markets, both have been great performers in rampant market conditions.
Since I expect market volatility to increasingly become a feature of 2007, I am keen to invest in funds that offer a dividend yield. Global income funds are increasingly becoming fashionable, but the well-established
Jupiter Japan Income and Resolution Argonaut European Income offer an above-market yield and have delivered excellent performance.
Having benefited strongly from emerging markets exposure over the past few years, I have recently taken some profits across these areas. I currently prefer to invest in companies and funds that will benefit from emerging-market growth without too much direct exposure. I presently invest in the Neptune Global Equity and M&G Global Basics funds for our global exposure, both of which are run by outstanding managers who have been inspired in selecting a number of takeover candidates.