Each week a professional investor tells MoneyWeek where they’d put their money now. This week: Martin Gray, fund manager, Miton Special Situations Portfolio.
Recent months have been good for investors with all asset classes on the whole turning in a positive return. Stock-picking has proved largely irrelevant – the mantra of ‘the greater the risk, the greater the return’ has been the most popular approach and volatility has been on the decline. The unfortunate result is that diversification of a portfolio has become irrelevant, let alone stock-picking – exchange-traded funds (ETFs) have soared in popularity and grown at a massive rate, but it means the good and the bad rise together. So can this last?
Commodity markets remain extremely strong, with a succession of individual ‘softs’ hitting headline highs. But with Western demand likely to slow in the face of fiscal austerity and high unemployment, and with China beginning to address its over-heating economy, it is difficult to understand how these rises can be sustained.
QE II (quantitative easing round two) is the US ‘solution’ to their employment, growth and demand problems, but QE has already extended its reach to many emerging economies that were, in the main, not too deeply affected by the banking crisis. Low interest rates in the US and other first-world countries are causing strong flows of easy liquidity to chase assets in those emerging economies, where growth looks likely to be stronger over the coming years. As a result, exchange-rate manipulation is becoming rife to stop currencies rising against the weak dollar. The hugely undervalued renminbi is causing further pain to these countries as it gives the Chinese further exchange-rate advantage in the export markets. The danger is that we will start to see an escalation in retaliation in the form of tariffs, subsidies and trade barriers.
At some point, America will have to abandon its expansionary policy and start to think about a credible plan to reduce its huge accumulated deficit. It may need further rounds of stimulus to keep the wheel spinning, but this is building up greater problems for the future. In short, it feels as if risk assets have already covered the easy yards (and possibly more) and that a more cautious approach is warranted.
One interesting area is commercial property. Valuations of ultra-prime have recovered their pre-crisis highs, while banks have been quietly extending loan repayment dates and rolling over interest due. But away from prime, things are likely to come to a head over the next couple of years as the level of repayment or refinancing of deals rises sharply. The industry has estimated that there is about $2,400bn of real-estate debt to mature over the next two years, of which the vast majority is located in the US and Europe. Much of this debt is ‘underwater’. Foreclosures and substantial write-offs for an over-geared banking sector look inevitable. However, there are still opportunities for selective investment, particularly with the strong recovery in the prime sector and yield will remain a key investment driver in a low-growth environment. We like real estate investment trust Land Securities (LSE: LAND) as a way to play the sector.
We also like healthcare. GlaxoSmithKline (LSE: GSK) and the Worldwide Healthcare Investment Trust (LSE: WWH – previously Finsbury Worldwide Pharmaceutical) are both picks based on the pharmaceuticals theme. As people are living longer, there is a greater need for drugs, which should be good for related companies.