Investment Adviser’s Ellie Duncan asks global equity managers which regions look attractive this year and next
Dylan Ball
Portfolio manager, Templeton Global Equity Group
UK
A relative safe haven in Europe? It’s been a good ride, especially in the mid caps. As a result, we are struggling to find much value in the UK, where our financial and healthcare holdings remain solid holds. One exception is in the energy sector. We are finding value in well-capitalised companies among the oil services, E&P and even the large integrated names. As ever, the best time to invest remains the point of maximum pessimism.
US
The US is in a classic late cycle stage market. Economic fundamentals are generally supportive and we are still finding attractive opportunities at the bottom-up level. The economy is far from recession. Corporate earnings reports have been largely positive, yet the market fears rate hikes. Value is starting to emerge in the mid-to-small cap end of the market, especially with higher-geared companies where earnings growth will be masked by higher interest costs. Rising rates can often lead to rising valuation multiples.
Europe
Lead indicators are holding steady, corporate earnings are improving and credit demand has been picking up. So Europe is still in the early stages of recovery with scope for revenue growth and margin recovery from very depressed levels. Stocks, by our metrics, remain cheap. Earnings are 30 per cent below their peak in 2007, so essentially the region has not recovered since the financial crisis. At the company level, though, we are seeing lots of progress. Interest rates remain low in the region and lending is finally beginning to recover.
Asia Pacific inc. Japan
We have been largely underweight Asia Pacific including Japan since 2007 after being significantly overweight throughout the 1990s and the first half of the 2000s. Today, holdings we have in the portfolio are heavily skewed to export-driven companies in Japan and South Korea which benefit from local currency weakness. These operate in predominantly the automotive and technology sectors. We remain on the sidelines in terms of domestic plays due to still rich valuations and/or weakening growth prospects.
Emerging markets/China
The recent underperformance of emerging markets stocks has created a number of selective opportunities, largely in Asia. While commodity producers are bearing the brunt of the downturn, attractive values persist among well-capitalised, well-managed enterprises with good exposure to secular growth trends. More broadly, recent selling pressure could mark a transition away from the market’s growth-oriented phase. We know China is slowing, but we are looking for companies that have that overly priced in.
Jeremy Podger
Portfolio manager, Fidelity Global Special Situations fund
UK
The UK has enjoyed reasonable economic resilience compared to continental Europe. From a macro perspective, improvement in employment indicators is somewhat offset by the poor record on productivity. As a market, a major factor in recent underperformance has been the prominence of resource companies in the FTSE index which may continue to be a drag. As a result, UK market earnings will fall in 2015 and a recovery in 2016 looks highly dependent on better commodity prices.
