Where in the world should you invest this year?
It's very difficult to decide which regions of the world are most attractive for investors.
In Europe, the financial crisis has worsened markedly recently, despite the Irish bail-out. Asian markets are still promising far better growth than Western economies, but the threats - of inflation and overheating - are growing, while the wall of money pouring into the region means valuations are starting to look stretched.
The US recovery is anaemic at best, and gridlock following Democrat losses in the mid-term elections may compromise the implementation of policies to get the economy moving again.
Brazil has been one of the few bright spots, but concerns about inflation, populist politicians and the country's reliance on commodities are growing.
We asked a wide range of investment experts to weigh up these issues and nominate their favourite areas.
Jeremy Tigue, manager of Foreign & Colonial Investment Trust, sums up investor opinion when he says the outlook for the continent "depends on what happens to the euro".
While the most gloomy economists are predicting an eventual break-up of the eurozone, others think normality will eventually be restored.
Tigue believes the eurozone will survive, although perhaps with a reduced membership. He adds that the euro is not particularly pertinent to the performance of European stockmarkets, however, as so many of the region's best companies are based in Germany, the exporting powerhouse of the region.
Their performance is driven much more by events in Asia than in Europe. Like UK companies, eurozone businesses earn an increasing proportion of their turnover from international markets, so Europe's continued weakness is working to its advantage.
Mark Harris, head of multi-manager at Henderson Global Investors, thinks there will be a "papering over of the cracks" in Europe, but its problems will not go away. Like Tigue, he prefers the northern countries, such as France and Germany, to the Mediterranean ones.
Rory Bateman, head of European equities at Schroders, says 2011 should be a good year for European equities. "The peripheral countries of Europe face significant economic uncertainty, but we expect the core European recovery to continue through 2011," he says.
"Furthermore, corporate profitability and cash generation are strong, given the period of excellent cost management during the downturn. Finally, valuations in the context of historic ranges versus other equity markets around the world and, most importantly, versus many other asset classes look highly attractive."
Mike Lenhoff, chief strategist at Brewin Dolphin, had a zero weighting in Europe until recently. He is increasing his weighting, but he will remain underweight because of political uncertainty.
Bill O'Neill, chief investment officer for Europe, Middle East and Africa at Merrill Lynch Wealth Management, thinks many eurozone countries - and particularly Spain, France and Italy - overestimate their growth prospects, but he
believes large European companies offer some of the best opportunities. He particularly favours energy and telecoms companies, while Harris is enthusiastic about pharmaceuticals.
Conclusion: Europe is attractive, but choose northern companies and big exporters.
The Japanese Nikkei 225 index is now more or less where it was a quarter of a century ago. In the intervening period, there have been regular attempts to call the turn - although they are getting less and less frequent - but bulls have invariably had to retire hurt as the decline continued.
It is not surprising that our investors are reluctant to repeat these mistakes. But, for the first time in ages, Tigue thinks it may be time to go overweight in Japan, although he admits that is partly because everyone is so negative.
However, he is also encouraged by the fact that the yen has strengthened this year, something that has been a long time coming.
He says: "The best indication is that a couple of Japanese investment trusts have wound up recently. That has been an infallible bull signal [in other areas] in the past."
David Coombs, head of multi-manager at Rathbone Unit Trust Management, only holds Japanese investments as a diversifier.
But he says Japan's focus is now much more on emerging than Western markets, so economic strength there should be good for their companies. "It is worth looking at," he adds.
Daniel Pasini, portfolio manager at ACPI Investments, says sentiment in Japan is awful, while valuations are cheap, but that has been the case for some time. He thinks recent quantitative easing by the US Treasury and the Bank of Japan could be positive for the market.
Conclusion: Japan is starting to look attractive, but that has been the case in the past and the market has continued falling. It may be worth a small exposure here, focusing on emerging market exporters.
In stark contrast to feelings on Japan, sentiment towards Asia is overwhelmingly positive. It is not hard to see why: while growth in the developed world is tottering at around 2%, China, India and many other Asian markets are growing at close to 10% per year.
Merrill Lynch's O'Neill sums it up: "The emerging world has become the source of global savings, with savings rates for 2009-14 forecast to reach 33% of disposable income, while rates in advanced economies continue to decline.
"These savings are turbo-charging emerging market growth to satisfy rising consumer demand, while US consumers strive to cut their debts and European governments tackle their massive deficits."
That strong savings rate means the emerging market story is now domestic rather than export led. Lenhoff points out that, while emerging markets account for a third of global GDP, they have accounted for 70% of GDP growth in recent years.
He thinks developing market growth will moderate, partly because interest rates in some areas - notably China - are rising to cool rapid growth, while the falling dollar is pushing their currencies higher.
"There will be a loss of economic momentum which, as [emerging markets] are so instrumental in pushing the global economy, means there will also be a slight loss of momentum for the global recovery."
Harris says emerging markets have been attracting considerable capital and have performed well recently. "Long term, they will be strategic winners, but you have to pay a high price for them [at the moment]. If you see a correction, you should buy. For now, however, the question is: will they outperform next year? You want some exposure, but there is no need to buy here and now."
Coombs agrees that the region is looking overvalued and thinks it is better to play the growth story for the region by buying Western companies that do a lot of business in Asia.
Conclusion: Long-term growth prospects are excellent, but wait for weakness before buying.
Matthew Strachan, head of North American equities for Alliance Trust, says the strategy of the Federal Reserve, and quantitative easing in particular, has been the key driver for the US stockmarket, which rallied sharply as the second bout was announced. "The question is: will it break free from that next year?"
Political uncertainty has increased following the mid-term elections, when the Democratic party lost its majority in the House of Representatives, and that could make it more difficult to achieve a consensus.
That makes Strachan a macroecomic bear, but he says: "I am a micro-bull because companies are proving adept at making profits, even in a lower-growth environment. They are beginning to increase their investment budgets."
Henderson's Harris thinks the US is reasonable value. "The risk is that the second round of quantitative easing will have more impact than anticipated and will push up inflation." That could put pressure on interest rates, increasing the economic headwinds.
As in Europe, he favours healthcare stocks, pointing out that industry analysts have talked about valuations in the industry being at "generational lows" - although reaping the value from this area could take more than a year.
Strachan likes technology and oil shares, where he sees value in companies, such as Intel, and infrastructure companies, such as Canadian Pacific.
Tigue is also enthusiastic about US companies. "They are vibrant and their technology lead is strong," he says. "It's a mistake to write off the US."
Pasini thinks the US market will start gaining traction in 2011 while its stockmarket is "cheap to fair value". He says: "Capital spending growth is gaining momentum, and companies have good cash flow and solid margins".
The weakening of the dollar should give its exporters an advantage. Andrew Bell, chief executive of Witan Investment Trust, is a bull on the US and its ability to make things work.
Conclusion: Economic growth is disappointing, but companies are performing well. Recovery could accelerate this year.
BRAZIL AND LATIN AMERICA
Brazil has been a favourite for investors, but Tigue sees a warning in the investment trust market. He points out that the market has risen 6.5 times in the past decade. "That is a reminder of what is going on," said Tigue. "The growth prospects are still good, unless there is a big upset in China."
Pasini thinks Brazil might be overheating, with too much credit given for housing in the year ahead of recent elections.
This article was originally published in Money Observer - Moneywise's sister publication - in January 2011.
All investment returns are measured against a benchmark to represent “the market” and an investment that performs better than the benchmark is said to have outperformed the market. An active managed fund will seek to outperform a relevant index through superior selection of investments (unlike a tracker fund which can never outperform the market). Outperform is also an investment analyst’s recommendation, meaning that a specific share is expected to perform better than its peers in the market.
Lower interest rates encourage people to spend, not save. But when interest rates can go no lower and there is a sharp drop in consumer and business spending, a central bank’s only option to stimulate demand is to pump money into the economy directly. This is quantitative easing. The Bank of England purchases assets (usually government bonds, or gilts) from private sector businesses such as insurance companies, banks and pension funds financed by new money the Bank creates electronically (it doesn’t physically print the banknotes). The sellers use the money to switch into other assets, such as shares or corporate bonds or else use it to lend to consumers and businesses, which pushes up demand and stimulates the economy.
A collective investment vehicle (known in the US as a “mutual” or “pooled” fund) and similar to an Oeic and investment trust in that it manages financial securities on behalf of small investors who, by investing, pool their resources giving combined benefits of diversification and economies of scale. Investors buy “units” in the fund that have a proportional exposure to all the assets in the fund, and are bought and sold from the fund manager. The price of units is determined by the value of the assets in the fund and will rise or fall in line with the value of those assets. Like Oeics (but unlike investment trusts) unit trusts and are “open ended” funds, meaning that the size of each fund can vary according to supply and demand of the units form investors. Unit trusts have two prices; the higher “offer” price you pay to invest and the “bid” price, which is the lower price you receive when you sell. The difference between the two prices is commonly known as the bid/offer spread.
Investment trusts are companies that invest money in other companies and whose shares are listed on the London Stock Exchange. As with unit trusts, private investors buying shares in an investment trust are buying into a diversified portfolio of assets (to reduce risk), which is managed by a professional fund manager. Investment trusts differ from unit trusts in two important ways: they are listed on the stockmarket and so are owned by their shareholders and are closed-ended funds with a finite number of shares in issue. This means the share price of investment trusts might not reflect the true value of the assets in the company (known as the net asset value, or NAV) and if the NAV value of a share is £1 and the share price in the market is 90p, the trust is said to be running a discount of 10% to NAV. But this means the investor is paying 90p to gain exposure to £1 of assets. Investment trusts can also borrow money and use this money to buy investments. This is known as gearing and a geared trust is thought to be more of an investment risk than an ungeared one.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
Generic, loosely-defined term for markets in a newly industrialised or Third World country that is in the process of moving from a closed economy to an open market economy while building accountability within the system. The World Bank recognises 28 countries as emerging markets, including Argentina, Brazil, China, Czech Republic, Egypt, India, Israel, Morocco, Russia and Venezuela. Because these countries carry additional political, economic and currency risks, investors in emerging markets should accept volatile returns. There is potential to make large profit at the risk of large losses.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
The total money value of all the finished goods and services produced in an economy in one year. It includes all consumer and government consumption, government spending and borrowing, investments and exports (minus imports) and is taken as a guide to a nation’s economic health and financial well being. However, some economists feel GDP is inaccurate because it fails to measure the changes in a nation's standard of living, unpaid labour, savings and inflationary price changes (such as housing booms and stockmarket increases).
A term applied to raw materials (gold, oil) and foodstuffs (wheat, pork bellies) traded on exchanges throughout the world. Since no one really wants to transport all those heavy materials, what is actually traded are commodities futures contracts or options. These are agreements to buy or sell at an agreed price on a specific date. Because commodity prices are volatile, investing in futures is certainly not for the casual investor.