Each week, a professional investor tells MoneyWeek where he’d put his money now. This week: Simon James, founder partner at Gore Browne Investment Management.
It may look as if the financial crisis is over. But anyone who believes that the after-effects of the trauma will be benign and even short-lived should think again. In Western economies, unemployment will remain high. Average take-home pay for those lucky enough to keep a job will show little, if any, growth for years to come. Government budget deficits must be substantially reduced over the medium term, and consumers concentrate on reducing debt.
We will therefore be cautious about investments in sectors that are dependent upon either public or private discretionary consumption for years to come. The free-spending path chosen by many countries will be littered with disappointments. And most of the big state-driven stimuli are behind us. As such, the emergence of developed economies from recession will be production-, rather than consumption-, led. Any consumption growth will come instead from developing economies. Whether this is state or privately funded is largely irrelevant, given these countries enjoy strong balance sheets. That said, overall global growth will appear relatively muted for several years. The next global leaders will be emerging economies, such as China and Brazil.
Inflationary fears will rise this year and should then subside. But that will only add to existing uncertainty, especially about interest rates, the cost of debt, and whether the private and public sectors can service it. So markets are likely to be volatile. Given that backdrop, here are four investing themes.
Firstly, we like British firms that have an exposure to growing markets, strong balance sheets, excess cash flow, relatively high dividend yields, and the ability to increase their dividends. The Trojan Income Fund’s investments, selected by Francis Brooke, boast these qualities (tel: 020-7499 4030).
Our second theme is infrastructure and utilities. Returns will have to remain attractive because more than £400bn needs to be invested in Britain during the next decade. Infrastructure funds have good yields, which tend to keep pace with inflation. Most conservative of these is the HSBC Infrastructure Fund (LSE: HICL), an investment trust.
Thirdly, we like scarce assets, such as oil, water or agriculture. The Martin Currie Global Energy Fund (0131-229 5252) focuses on oil. ‘Peak oil’ is inevitable. There is a high probability that, by the middle of the coming decade, demand will outstrip supply. Hence prices should rise over the next few years. The Global Energy Fund provides better exposure to this trend than the oil majors, such as BP and Shell. Their operations are so integrated that they are either big winners or losers when prices rise or fall. Martin Currie has a strong team in natural resources, lead by its managers Duncan Goodwin and Ruairidh Stewart.
Our final theme is technology, chosen because we expect a production-driven recovery in the West. The Herald Investment Trust (LSE: HRI) invests in smaller-cap technology companies, with a bias towards Britain. Katie Potts has run the portfolio since its inception in 1994 and she is supported by a team dedicated to investments in technology and media. Both long-term and short-term performance have been strong, and yet the shares stand on a discount to net assets of more than 20%.