The often-indiscriminate trading patterns resulting from current market volatility can create investment opportunities for investors patient enough to back long-running themes. At Taylor Young, we consider thematic investment vital in generating above-average returns for our clients, and we relish the challenge such markets present.
Within the UK equity market, for example, we have been increasing exposure to areas such as real estate. Here, the move to REIT status enabled by recent legislative changes in the budget will make many of the larger quoted property stocks more attractive to a wide range of investors. We have also been focusing on stocks where management action might enhance shareholder value. For instance, the recent announcement of the de-merger of GUS into two component companies should, in our view, provide more attractive returns than might formerly have been the case. Similarly, we feel there is considerably more value to be unlocked in Pearson on a medium-term view than the current share price would suggest.
One key theme we continue to promote is the fundamental strength and growth potential of a number of the economies in the Pacific Rim. We continue to highlight Standard Chartered Bank (STAN), our favourite banking stock, whose franchise in the Far East is particularly robust, and where a large stake in the company has recently changed hands. We also favour Prudential (PRU), which saw some merger and takeover activity earlier in the year, and which has been successfully growing its insurance business and brand awareness throughout Asia. Both companies are naturally large enough to feature in the
FTSE-100 index, but in a global market driven by consolidation, both could be seen as attractive situations by a number of larger groupings in the US and Europe. As ever, the timing of individual purchases must be considered very carefully and in the context of overall portfolio construction.
From an asset allocation perspective, we still advocate remaining overweight in equities relative to bonds in all major markets. Inflationary pressures are ongoing in developed economies, so the yield basis of global bond markets still looks unattractive. As interest rates continue to climb, the relatively safe haven of cash remains a more attractive option than bond markets.
In equity markets, we focus on the UK, Germany and Japan. The recent sell-off in Japan has again produced a medium-term buying opportunity in an economy where the fundamental and long-standing threat of deflation seems finally to have been conquered. Moreover, Japan’s domestic corporate sector is in the best financial shape it’s been in for years.
Speculating on relative currency movements over any protracted period is often fruitless, but we are convinced that sterling is overvalued against the euro – and considerably overvalued against the yen. There appear to be many convincing arguments for the dollar devaluing against a basket of major currencies. Sterling will be seen more as a dollar-related currency than a member of the euro-bloc, and its relative value will change accordingly. For the majority of our clients with sterling liabilities, there may be some opportunities to benefit from the weakness we envisage in the pound by investing on a selective basis in some of these preferred markets.