What to look for now in global equities


As the world keeps changing, so does the way you should look for investment opportunities around the globe.

You do not always have to invest directly in emerging markets to take advantage of opportunities within them, says one of the world’s largest fund managers.

“I am cautiously optimistic about the prospects for global equities,” says Amit Lodha, Portfolio Manager of the Fidelity Global Equities Fund. “My optimism stems from improving economic data out of the US and recent actions by authorities there to stoke the economy. These developments mean that the likelihood of an economic double dip has receded in the near term. At the same time, emerging market economies should continue to grow strongly, as long as inflationary pressures remain manageable.

Mr Lodha said, “On the corporate front, earnings growth should remain fairly strong going forward, although this is largely factored into stock prices. I also expect M&A activity to be more prevalent this year, as cash rich companies deploy their reserves to tap growth, which should be positive for markets.”

Nevertheless, he cautioned there were also areas of concern. “Europe continues to grapple with tricky sovereign debt issues that need to be worked out. At the same time, the unprecedented stimulus applied to the global economy post the credit crisis is giving rise to inflationary pressures which will need to be countered by monetary tightening. It is unclear how equities will react to such developments because the magnitude of the stimulus applied makes it difficult to compare.”

He suggested one of the best ways to look for opportunities was to look at individual companies, individual investment opportunities. “I look for under-appreciated growth. Ultimately, I am looking for companies which are expanding their profit margins and growing their cash-flows. I look for industry structures which offer attractive profit characteristics. For example, if an industry is becoming more consolidated, I would want to look for potential beneficiaries within that sector. I also consider M&A potential when comparing stocks.

“For example, there are many ways to take advantage of the significant scope for an increase in car ownership in emerging markets, other than the obvious one – the emerging market car manufacturers. One can invest in raw materials producers (such as the iron ore producers), the dry bulk carriers that transport the raw materials, the steel mills, the auto part manufacturers, the tyre makers, the distributors and so on.”

He noted, ”Pricing power in the car manufacturing chain currently lies with the iron ore producers or the copper producers, as both materials are in short supply and are critical for the manufacture of a car. These manufacturers need not be listed in emerging markets. For example, some of the largest mining companies in the world – BHP Billiton and Rio Tinto – have seen huge growth in their revenues and earnings due to the increase in demand for raw materials from emerging markets, yet they are listed in the developed markets of the UK and Australia.

“Similarly, the auto manufacturers do not have to be listed in the countries from which demand is coming. Take Daimler and BMW; they are both listed in Germany, but are seeing very strong demand in emerging markets like China and India, where their brands hold strong appeal. The brand, in turn, gives them pricing power as well.  Pricing power and the uniqueness of an asset are key attributes of the businesses that I like. When the stocks of such businesses also have good valuation support that gives a fair margin of safety on investment, they will become part of the portfolio irrespective of where they are listed.”

He added, “Geographic positioning tends to be a product of where I am finding the best stock opportunities. Where a stock is listed is less important to me than where the company actually generates its revenues.  For example, BHP Billiton is listed in the UK, but its revenues are primarily driven by Chinese demand for its commodities. Meanwhile, Tata Consulting Services is listed in India but its revenue stream is driven by demand for IT services in the US. If you look at Europe, we have seen a lot of negative macro newsflow. However, this obscures the fact that there are lot of world class companies that are on attractive valuations. Companies like LVMH and Volkswagen are finding excellent growth drivers in emerging markets.

“That said, Asia is part of the world that I want to be exposed to, both directly and indirectly. The growth of economies in Asia is a theme that will be with us for the rest of our lifetimes. My recent visits to both India and China have given me further conviction that the long-term growth story associated with these countries, and the region as a whole, remains intact.

“However, the theme is well recognised in the market, which means the valuations of companies listed directly in these markets can be rich, and one needs to be very selective. I also play this theme through companies that are exposed to the growth but may be listed elsewhere.  Near-term, country-specific developments also need to be monitored carefully, particularly as Chinese authorities remain focused on tightening measures and India grapples with political uncertainty and infrastructure bottlenecks.”

Mr Lodha said his fund’s largest overweight was in the technology sector, where there are currently interesting new products being launched, such as smartphones and tablets.  “I also expect the sector to benefit from a pick up in corporate spending, as enterprise demand looks set to normalise with companies planning long-term IT strategies again. Cloud computing, for instance, is an area which should see increased interest. Despite generating good cash flows, some of the large cap technology names trade on attractive valuations.

“Energy is another area where I find comparatively more ideas.  This reflects both interesting opportunities at stock level as well as my positive view on the end-demand for oil in the medium to long term, as we are starting to see a significant increase in car ownership in emerging markets for example. More cars are now sold in China than in the US. I have exposure to E&P businesses, some of which are operating in promising under-explored areas, such as Columbia, as well as energy services firms, particularly those with specific expertise such as deep sea drilling. The fund is also overweight telecommunication services, as I expect smartphone adoption to boost data usage and telecom operators’ revenues in countries like Japan.

“Conversely, the fund is underweight utilities in view of unattractive growth prospects and regulatory overhangs, as well as consumer discretionary and staples following some profit taking in areas such as tobacco, brewers and clothes retailers.

“While the fund remains underweight financial services firms as a whole, I have reduced the underweight recently in view of signs of a pick up in loan growth. I continue to prefer US banks, which have been more proactive in addressing their issues and are consequently in a stronger position compared to their European counterparts. The fund also exposure to some well-run emerging market banks that stand to benefit from increased penetration. I have also recently added some attractively valued Japanese financials that would benefit from asset reflation.”

This document is issued by FIL Investment Management (Australia) Limited ABN 34 006 773 575, AFSL No. 237865 (“Fidelity Australia”).  Fidelity Australia is a member of the FIL Limited group of companies commonly known as Fidelity International. Prior to making an investment decision, retail investors should seek advice from their financial advisers. Investors should also obtain and consider the Product Disclosure Statements (“PDS”) for any Fidelity fund mentioned in this document. The PDS is available at www.fidelity.com.au. This document may include general commentary on market activity, sector trends or other broad-based economic or political conditions that should not be taken as investment advice. Information stated herein about specific securities is subject to change. Any reference to specific securities should not be taken as a recommendation to buy, sell or hold these securities. While the information contained in this document has been prepared with reasonable care, no responsibility or liability is accepted for any errors or omissions or misstatements however caused. The document may not be reproduced or transmitted without prior written permission of Fidelity Australia. The issuer of Fidelity’s managed investment schemes is Perpetual Trust Services Limited (“Perpetual”) ABN 48 000 142 049. Perpetual is not the publisher of this document and takes no responsibility for its content. Reference to ($) are in Australian dollars unless stated otherwise. © 2011 FIL Investment Management (Australia) Limited.  Fidelity, Fidelity International and the Fidelity International and Pyramid logos are trademarks of FIL Limited.

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