Global opportunities: Where to look

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.

US

The US market has led the world in recent years but this year, as in other regions, the main challenge is that company profit growth has come to a halt. To a large extent this reflects the impact on foreign earnings of the rise in the US dollar and also the collapse in the oil price and its effect on oil-related companies. These effects should lessen in 2016 and profit growth should resume, albeit at a modest pace. In this time of heightened uncertainty the US market remains relatively low-risk, in spite of valuation levels that are not obviously cheap.

Europe

Europe’s recovery since 2009 has been disappointing versus the US but the recent oil and currency moves should be helpful, though economic growth may still not be strong enough to see a major recovery in the more cyclical parts of the market, which, however, are attractively valued on a longer-term view.

Asia Pacific inc. Japan

Outside Japan, Asia has been disappointing in performance terms as well as in the development of the background conditions for company profits this year. On a longer-term view, Asian markets offer interesting value based on measures such as price-to-book ratio but the continuing downgrading of earnings expectations is likely to restrict the upside in the shorter term. In contrast, Japanese companies are on track to deliver around 15 per cent earnings growth in 2015 and solid further growth in 2016.

Emerging markets/China

Much has been written recently about the plight of emerging markets. It is clear that growth rates in China have come down and that the rebalancing of the economy away from fixed asset investment and towards consumer services is a negative for China’s trading partners. Encouragingly, the Chinese domestic stockmarket, which was in bubble territory, has now corrected. Looking ahead, we need to be vigilant to the feedback from weak currencies in countries such as Brazil, Russia and Indonesia. It is too early to turn very positive.

James Davidson

Global equity income manager, JPMorgan Asset Management

UK

As income investors we look at the dividend yield on the FTSE, currently twice that of the S&P 500. The market became investable again following the election, while solid wage growth and continued economic growth have helped our equities to perform strongly. Holdings that we favour include Berkeley Homes and Direct Line, both yielding around 6 per cent. More recently, we have taken some profits, as some of the more cyclical holdings in media and hospitality are exposed to sterling’s strength, and emerging market woes are expected to impact the UK more than some other economies.

US

The outlook for US economic growth is relatively modest but steady. The underlying economy, decent earnings and a healthy consumer should support equities, albeit with potentially heightened volatility around a prospective interest rate increase. Overall valuations are not inexpensive, but they also do not look overly stretched. In general US companies choose to divert more capital towards share buybacks than dividends, making them less attractive prospects. We would like to hold more exposure to the US, but dividend yields are not as compelling for global income investors.

Europe

Another high-yielding market, where the profits cycle is substantially behind the US and where equity income investment prospects are constructive, based on current dividend yields. Income investors have significant opportunities in banks where dividend payments are on the rise. Examples include ING and Intesa, where yields may reach 6 per cent sustainably. With European Central Bank rates set for the periphery, there are also interesting income opportunities in the booming German economy via such companies as Deutsche Wohnen, the largest residential landlord in Berlin.

Asia Pacific inc. Japan

The Asia Pacific market excluding Japan is mostly dominated by Australia, which is of limited interest to us as income investors, given the predominance of struggling mining companies and banks with subpar dividend prospects. Within Japan we are somewhat contrarian, as it hasn’t historically been seen as an interesting market for income investors. Government-promoted shareholder-friendly policies are having a significant impact on companies, encouraging them to return more capital to shareholders in the form of dividends. The situation is reminiscent of Germany in the 1990s.

Emerging markets/China

We would be relatively sceptical on emerging markets based on governance and foreign exchange risk. On a relative basis we can find more compelling opportunities in other regions. Moreover, emerging markets are likely to be negatively impacted by any rise in US rates, which may compound the weak manufacturing data from China. Having said that, there is a growing opportunity set of high dividend yielding companies, so there are certainly selective investment opportunities. Russian nickel manufacturer MMC Norilsk is a high-yielding (12 per cent historic yield) company that we favour.