Each week, a professional investor tells MoneyWeek where she’d put her money now. This week: Kathleen Brooks, UK research director at Forex.com.
It’s been an eventful few months for investors. A second round of quantitative easing in America, global currency wars, and another bail-out for a eurozone state have all caused waves in market sentiment. There is plenty of recent market history to digest before planning your investment portfolio for 2011. Here are three investments that I like for the short to medium term.
The FTSE 100 is an international index. Its largest members include HSBC, Royal Dutch Shell, BP and Vodafone – all large multinationals that don’t rely on Britain for the bulk of their earnings. That is good news as austerity measures are set to be implemented in Britain in the coming months and years, which may well keep a lid on growth. The two largest sectors in the index are financials (21.03%) and oil and gas (18.47%) and we believe the outlook for both is good in the medium term.
Commodities should remain propped up by demand from emerging markets. Although the Chinese authorities are trying to slow growth, in our opinion this is a sign of economic strength and would create more sustainable growth conditions for the future. Britain’s financial sector has been under pressure in recent months. British banks are particularly exposed to Irish debt. Since the start of November, Lloyds Banking Group has sold off nearly 9.5% and Royal Bank of Scotland has fallen more than 15%.
However, we believe that the market is pricing in the worst-case scenario for the eurozone, and that the euro would have to collapse to justify further large losses. We recommend going long the whole index, rather than on individual stocks, to diversify your position over a variety of sectors.
We also like the prospects for Turkey in the medium-to-long term. Turkey is in an interesting position, as it is an emerging-market economy yet has ambitions to join the West. The Organisation for Economic Co-operation and Development (OECD) forecasts GDP this year of 8.2%, with growth moderating to a more sustainable 5.3% in 2011 and 5.4% in 2012.
Although growth will slow next year, it is still expected to outpace America and Europe. The balance between exports and domestic demand is healthy, given the global outlook is far from certain. The lira has suffered during the recent flight from risky assets – dollar-lira has retraced nearly 40% of its down move since the summer. Once the outlook for risk improves, there may be some good opportunities to short dollar-lira.
Our third position is short euro-dollar. The euro has held up remarkably well since two of its members applied for EU/IMF bail-outs to avoid defaulting on their debts. But the market is no longer willing to give the eurozone the benefit of the doubt over its debt problems. Since Ireland applied for funds from the International Monetary Fund (IMF) the focus has shifted to whether Portugal – and even Spain – will do the same. The market is also questioning whether the EU/IMF stabilisation fund is a sufficient long-term remedy for the real problems plaguing Europe’s peripheral nations – flaky economic growth and low competitiveness.
One way to achieve the right structural changes will be through a weaker euro. While we think that the eurozone will survive this crisis (as I noted earlier), and could even come out stronger and more resilient in the future, there is a painful period of readjustment to come. And we believe that this may be reflected in a weaker euro.