Each week, a professional investor tells MoneyWeek where he’d put his money now. This week: Stephen Watson, fund manager, Hume Capital.
Global stockmarkets may be at a turning point. The 75% rally since March 2009 has stalled in 2011 so far. Concern about the recovery faltering and the threat of rising interest rates in Asia has led to higher volatility. The liquidity-fuelled rally is petering out as monetary and fiscal policy gradually normalises. This will lead to important changes in global equity markets for the rest of 2011 and 2012. Investors will need to pay close attention to profit from them.
The British and US economies will struggle due to their reliance on indebted consumers and overburdened public sectors. But Asia and continental Europe are likely to prove robust. The market is also failing to recognise the potential for strong GDP growth in Japan. Momentum is building for a major rebound following the Fukushima earthquake. Just look at last month’s comments by the chairman of Japan’s second-largest house builder, Sekisui House (JP: 1928). He said Japan would undergo a building boom in the next 12 months. Note that after the Kobe earthquake in 1995, a dip in production in March to June was followed by a powerful rebound in 1995 and 1996.
Globally, corporate profits are holding up well, with forecast growth of 12% in 2011 followed by 10% in 2012. Valuations are inexpensive and corporate cash flow is prodigious. VW (Xetra: VOW) and Siemens (Xetra: SIE) are running positive balances of $30bn and $20bn respectively, while Japanese corporations are running a staggering $2.4trn of net cash, which they are increasingly using to make acquisitions, as evidenced by last month’s $20bn purchase of Nycomed by pharma giant Takeda (JP: 4502) as well as Toshiba’s (JP: 6502) $2bn takeover of smart grid group Landis & Gyr. Yet dividend yields are higher than bond yields – normally a sign of economic distress. A buy signal perhaps?
Advances in energy technology, the investment revival in the West and consumption growth in the East are the key dynamics shaping the world. These areas are likely to prove most profitable for investors in this new cycle. Sectors such as aerospace, with its new generation of fuel-efficient jet liners, will do well. So will related industries, such as firms involved in making carbon composite materials for aerospace. Investment in new technology for telecommunications, such as the new 4G standard, should prove profitable for Ericsson (Nasdaq: ERIC) and ZTE (HK: 763), while storage data companies like Telecity (LSE: TCY) are springing up to deal with the data requirements of cloud computing. Retail and services growth is well underway in Asia. Companies such as Huabao (US: HUABF), market leader in food and beverage flavourings in China, are taking advantage of the developing consumer growth.
But we are cautious on US and European banks as regulatory constraints grow. Government cuts and the end of cheap money will make it harder for enterprises reliant on the Western consumer or public sector. We would also resist the temptation to move into the seemingly cheap telecom, utilities and healthcare sectors. All will be hit hard by the upheavals in their regulatory frameworks and the need to invest in new technologies to maintain their competitive edge.