Each week, a professional investor tells MoneyWeek where he’d put his money now. This week: Andrew Jones, global equity fund manager, Henderson Global Investors.
As we say goodbye to a great sporting summer and head towards the autumn months of 2013, it seems likely that the macroeconomic, ‘big picture’ issues we will face are variations on the themes we have been dealing with throughout the year so far. The pace of the economic recovery in America, and the timing of the Federal Reserve’s winding down of its quantitative easing (QE) programme (the so-called ‘taper’) is probably foremost in investors’ minds just now.
But other things to consider include the health of the Chinese economy, the success or otherwise of Japan’s ‘three arrows’ of economic reform, and whether Europe is finally starting to see tentative signs of recovery.
All the same, although there have been significant issues to deal with, stock markets have performed well, with the MSCI World Sterling index up 17.8% to the end of August following a strong year in 2012. Valuations of markets have been central to this performance – markets traded on earnings multiples that were attractive relative to bonds and cash, and were also not stretched in historic terms. Following the rerating that has occurred since then, what sort of companies do we find ourselves drawn towards now?
In the light of the macro uncertainties above, one common theme is that of ‘self-help’. This is where a company has the potential to deliver good performance, even in an uncertain economic environment.
Deutsche Post (Frankfurt: DPW) has been reaping the benefits of refocusing on its domestic German post business and its global logistics business, DHL, having got out of underperforming businesses in America. Internet shopping is leading to rapid growth in parcel deliveries in Germany, which is now offsetting falling volumes in general mail delivery.
DHL, meanwhile, has been delivering strong growth, particularly as a result of its leading position in the Asian region. With its combination of exposure to one of the strongest European economies, and a world-leading logistics business, Deutsche Post looks well placed to grow earnings and dividends.
Swiss pharmaceutical company Novartis (Geneva: NOVN) offers a relatively stable earnings profile, a good level of dividend payout and also has significant potential to generate value from portfolio rationalisation. For instance, the company has a relatively small but valuable consumer health business, a vaccines business that appears to be subscale, and also a significant stake in Roche, which has almost trebled since Novartis acquired it. With a new management team in charge, the potential for refocusing the business and adding meaningful value to it appears significant.
Technology giant Microsoft (Nasdaq: MSFT), on the other hand, is going through a transition phase, following a period when its consumer-facing business has clearly been slow to respond to new competition. Despite this, it still generates high profit margins and its Windows and Office software is embedded with its business users, which creates significant recurring revenues. There is also the potential for Microsoft to become one of the biggest players in ‘cloud’ services. With around 20% of its market value in cash, a low earnings multiple, and offering double-digit dividend growth, investors are being paid to wait for the company to turn around.